Two thirds of portfolio landlords are planning on using limited companies to buy their next investment properties.
That’s according to new research by Precise Mortgages, which implies that experienced landlords are utilizing company structures to shield themselves from costly tax reforms.
Here, we explain the tax and mortgage implications of setting up a buy-to-let limited company.
Portfolio landlords buying through limited companies
If you're looking at purchasing property or are a seasoned landlord looking to maximise your buy-to-let returns, you might be wondering be it worth establishing a limited company.
A new report through the specialist lender Precise Mortgages claims that nearly sixty-six per cent (64%) of portfolio landlords (those with four or more properties) are intending to using limited companies to buy their next properties.
This is in stark contrast to landlords with smaller portfolios. Just 17% of investors with fewer than four buy-to-let properties intend on utilizing a company structure.
Why set up a limited company?
In the past few years, a swathe of buy-to-let reforms have hit landlord profits, in the stamp duty hike for real estate investors towards the tapering of mortgage interest tax relief.
The latter reform particularly has a substantial impact on investors who pay tax at the higher rate. In fact, a higher-rate-paying landlord letting a home for lb950 per month often see their goverment tax bill double from April 2022.
With profits threatened by, some experienced landlords have chosen to setup buy-to-let companies. By using a company structure, landlords can offset all their mortgage interest against their tax bills as a business expense, and instead pay corporation tax at a flat rate of 19% (18% from April 2022).
Some investors, meanwhile, have set up companies as a response to mortgage stress-testing changes brought in through the Bank of England’s Prudential Regulation Authority, which mean portfolio landlords need to show their rental income is going to be at least 145% of the mortgage costs on each investment property.
The report by Precise claims that 73% of landlords believe stricter stress-testing makes it more difficult to secure finance, and this has resulted in some investors deciding a business structure offers an easier route to receiving a mortgage.
The costs of setting up a buy-to-let company
While it’s correct that setting up a company will allow you to offset your mortgage interest, there are a number of costs involved – especially if you’re transferring properties across to the new structure.
First of, you may need to pay stamp duty in your current properties as you will be 'selling' them to the company. You may need to element in capital gains tax liability, too.
And while some landlords find the stress-testing process easier for limited companies, home loan rates are usually significantly greater than those open to individual landlords, despite more limited company deals coming on to the market during the last year.
Buy-to-let mortgage rates
Let’s take a look at the different fixed-rate mortgages on offer to landlords operating as individuals and firms.
The chart below implies that the least expensive rates on limited company mortgages are usually around 1% more expensive compared to those open to individual investors.
Buy-to-let company mortgages: three things to be careful for
You can find out more within our guide, buy-to-let mortgages explained.
Is it worth setting up a buy-to-let company?
With the complexities around running a property investment business and also the need to keep abreast of the various taxation changes, it’s easy to see why limited information mill primarily utilized by experienced portfolio investors, rather than ‘accidental’ landlords or hobby investors with a couple of properties.
The decision over whether or not to set up a company involves a great deal of weighing up various financial implications.
For this reason, it is recommended that you take professional mortgage and tax advice before moving your buy-to-let properties right into a company structure.
