The rise in Buy to Let properties throughout the UK is not slowing down which has made financing them in a tax-efficient way increasingly important for property investors.
For many investors with small or large portfolios, the tax benefits of buying property through a limited company can be significant.
In this article, we will run through the key differences and benefits.
The Following Topics Are Covered Below:
What Is A Limited Company Buy To Let Mortgage?
A Limited Company Buy-To-Let Mortgage can be in an established vehicle for investment or an SPV (special purpose vehicle).
The main benefit of purchasing a rental property in a company's name is tax-related.
The mortgage interest payments can be written off as an expense lowering your profit and tax payable. In an individual Buy To Let, this cannot be done and the interest payment is treated as total income on which tax is payable.
How Do Company Mortgages Differ From Standard Buy To Let Mortgages?
If your approach is to live in the property yourself then this is not for you. However, if the goal is to create a regular income stream through a company, then you could potentially save money by purchasing your rental property and mortgage, through a company set up solely for this purpose.
The Buy to Let lending market used to price a higher interest rate for companies but off late, the differential between a company or a consumer Buy to Let is very minimal and there is no difference in the Loan to Value given against the property.
How Do You Set Up A Limited Company And Which SIC Code Should I Use?
Setting up a limited company is easy and can be done online in under 30 minutes and you'll just need to register a name that has not been taken before with a cost of £12. If you don't have a registered address, you can use your own residential address.
For Buy to Let companies, you should have one or more of the following SIC Codes:
68100- Buying and Selling of own estates
68209- Other letting and operating of own or leased real estate
68320- Management of Real Estate
68201- Renting and Operating Housing Association Real Estate
What Requirements Are There With a Limited Buy-To- Let Mortgage?
It's important to make sure the property you are interested in purchasing meets the following criteria:
Maximum Loan to Value (LTV) will be circa 70%-75%
The minimum property value starts at £50k
Your property rents will need to cover a minimum of 125% of the mortgage interest. However, some lenders may require more than this, for example up to 150% depending on the situation.
Some lenders may have a minimum earned income threshold for applicants.
Houses of Multiple Occupants (HMO) are generally accepted
Some lenders require minimum and maximum age terms
Both Variable and Fixed Rates are available
Minor Adverse Credit Accepted
There is usually no minimum time that the company has to be incorporated for.
Dividend payments will often be more tax-efficient than salary due to the preferable rates, particularly if you are a higher-rate income taxpayer. The list of rates that are updated regularly can be found on HMRC's website
For the current tax year, you have a tax-free dividend allowance of £2,000 with the remaining amount calculated based on your personal income tax bracket.
The tax rate on dividends over the allowance
** Please note, that your tax band will be calculated based on the value of your earned income + dividend income added together (rates above may change, please check the HMRC website for further updates.
With a company, paying corporation tax at 19% and dividend tax may leave you with a higher monthly cash flow in comparison to playing a standard rate of 40-45% income tax as a private landlord. It is wise to consult with a tax accountant as there are other company expenses that need to be factored in including a higher interest rate with a company mortgage, accountancy and admin fees.
Mortgage Interest Tax Relief
Prior to 2017, it was profitable for higher rate taxpayers to offset their mortgage interest against tax to avoid paying 45% income tax on the value of their annual interest. However, from April 2020 the government has now removed this ability allowing for a blanket of 20% tax credit for both basic or higher rate taxpayers.
The difference with a Limited Company mortgage is you will be able to claim this as an expense against your corporation tax of 19% and not lose out by owning the property via a company.
Stamp duty is payable for residential properties through a limited company
To find the table of the current Stamp Duty Tax brackets please follow our Buy to Let Mortgage page.
Inheritance Tax Planning
If you plan to transfer a property to a family member it is far more affordable and quicker transferring through a company.
Standard Inheritance tax rules mean if you die within 7 years of transferring property, it will be subject to inheritance tax. It's also important to bear in mind the legal fees involved with transferring private property into a new name.
Capital Gains Tax
The current capital gains tax paid when selling a rental or residential property is 28% for higher-income tax ratepayers. You also have the annual Capital Gains Tax allowance which is £12,300.
With a limited company, the profit from the sale is taxed through company corporation tax at 19% which means you could end up paying less tax despite not being eligible for the annual capital gains tax allowance through a company.
Tax rates change annually, so it is important to seek professional financial advice before making a decision. HMRC publish new rates and it's best to check on the government site to make a comparison.
How Can Accelerated Finance Help?
At Accelerated Finance, we have access to over 50 specialist lenders that offer tailored solutions to help you find the best mortgage rate in the market.
We are trusted by the lenders we work with and have developed a long-standing relationship to give our clients the best possible experience. You can start today by simply filling in our online form to get started and compare the best buy-to-let mortgage rates in the market.
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice. Your home may be repossessed if you do not maintain repayments on your mortgage.