What is a Buy To Let for Limited Companies?
Tax changes are always in the news and they’ll have an impact on a large selection of people involved in property and commercial property finance. Many landlords and owners will or have considered setting up a buy-to-let limited company to get around and current and future painful tax laws*
*Finance for Entrepreneurs are specialists in commercial & business finance and don’t provide tax advice. Any tax changes discussed in this article may have been announced but not yet implemented; should you require tax advice we can refer you to a qualified tax advisor on request, or you can find out more on the Government’s website.
What do you need to think about?
There have been big changes have affected and will affect anyone who owns multiple buy-to-let residential property (BTLs). There are new rules for both stamp duty and mortgage interest tax relief — which started in 2016 and were rolled out over a period — that drastically changed the economics of owning buy-to-let properties for many individual professional landlords.
The affect on landlords who trade as individuals will be significant — they’ll pay a lot more stamp duty when they purchase new properties, and it isn’t a fantasy to expect it to be as much as 3 or 4 times as much as the pre-April 2016 system. For a large quantity, that means buying new properties to add to a property portfolio could become expensive, enough to have second thoughts.
Tax relief rules were also changed, buy-to-let landlords who are in the top two income tax brackets now can’t claim back as much of their mortgage interest. For most 40% and 45% taxpayers, that means they’re paying more tax overall.
These two changes make it more economical to run a buy-to-let business via a limited company, rather than as an individual. In a worst case scenario, it may not be viable to run a buy-to-let business as an individual at all.
So, I think I need a Buy-To-Let mortgage!
The reduced tax relief for individual landlords means that many people in this situation may choose to set up a limited company for their buy-to-let portfolio — for many, this will be cheaper overall. You can still get mortgages to purchase buy-to-let properties, but doing so through a limited company has different considerations to a standard buy-to-let mortgage.
Many lenders offer options to buy rental property through a limited company — we work with a range of lenders, for example NatWest, Lloyds & Barclays to name a few, who can help, if you decide to incorporate for buy-to-let.
In fact, some lenders have buy-to-let mortgage for limited companies up to an 80% loan-to-value ratio.
Generally, it’s possible for a limited company to get a buy-to-let mortgage around 70-80% LTV, and most lenders are able to do this. Once you’ve set up the company, the rest of the process is largely the same, with a few added bits of paperwork. The deposit can be gifted or loaned to the company, and if you should sell the property in the future, the profits belong to the company. You can can then reinvest into new properties, or withdrawn and then be taxed as personal income/capital gains.
You can also get bridging loans, auction purchase finance, property development finance, and more through a limited company — so once the initial setup is done, you can grow your property portfolio as normal.
Before we get carried away, remember Stamp Duty!
The first change that came into effect was the new rules for stamp duty (‘Stamp Duty Land Tax’), which applied from the start of the new tax year 1st of April 2016. Stamp duty the tax paid when you buy a property (whether as a home or buy to let), as a percentage of a property’s total value. It’s calculated using value bands, in a similar way to income tax, so the percentages go up as the value of the property increases. You don’t pay any stamp duty on properties worth less than £125,000, and then stamp duty goes up through 2%, 5%, 10%, and finally 12% for the most valuable properties.
But here’s how it works for buy-to-let landlords…
Stamp duty is the same for all private individuals — whether they’re full-time landlords or the co-signing parents of first-time buyers. However, the new rules, now make stamp duty 3% more across the board for those who already own a property in England and Wales (it’s different for Scotland). So if the new purchased property is a buy-to-let or a second home, rather than being 0%, 2%, 5%, 10% and 12%, the stamp duty will be 3%, 5%, 8%, 13%, and 15%. It might not sound a big deal, three percent; but it makes a big difference in some circumstances.
Before you go running off to Companies House…
If you were thinking of transferring buy-to-let properties to a limited company wrapper, make sure you include the setup costs. You will almost certainly want to talk to a qualified accountant to make sure your plans stack up; there would also be implications for capital gains tax and stamp duty. These two combined might make the move expensive enough to make a landlord think twice.
Some have suggested a potential strategy would be keeping properties you currently own as privately-held, and having a limited company for any future property investment purchases. also consider your medium- and long-term goals. If you don’t need access to the money tied up in your Buy-To-Let property, an incorporated structure makes sense. On the flip side, if you’ll regularly move money in and out of the company, capital gains tax, stamp duty and inheritance tax could all come in to play.
Running a limited company also comes with administrative tasks and responsibilities, like record-keeping, as well as annual returns and accounts. It can take a few months to get things going. It could be that a company structure makes sense for BTL landlords who own lots of properties, but might not be worth the trouble for buy-to-let investors who own one or two properties.
As with anything, there is lots of things to think about if you’re looking into setting up a limited company for your buy-to-let properties. In most cases, it’s a favourable move, but everyone is in a different situation — and many different areas of individual and commercial tax law are always a part of the mix!