Is it Time to Go Limited?
With new tax rules beginning to bite, more and more buy to let investors are looking at how to optimise income from their portfolios, and setting up a limit company is the preferred option.
New research shows that two thirds of portfolio landlords are looking into the use of limited companies as a way to get around changes in the rules on mortgage interest tax relief and other changes to the rules governing buy to let.
The limited company model is becoming more popular
Conducted by Precise Mortgages, the study also suggests that those with four or more buy to let properties can benefit most from the move to a limited company, although all higher rate tax payers can take advantage of the 19% rate of Corporation Tax, regardless of how many properties they own.
Currently only 17% of non-portfolio buy to let landlords - those with less than four properties - choose to go down the corporate route, but that is changing as the phased changes to mortgage interest taxation continue to bite.
What are the advantages of a limited company?
While it cannot protect you from the new additional rate of Stamp Duty for second homes, a limited company does allow you to write off all mortgage interest payment as a business expense, whether or not you choose to leave the income in the company.
Limited company status also means that, because you only pay Corporation Tax based on your profits, every penny of income you make from your buy to let investment properties can be invested in new projects tax-free.
Mortgage stress-testing complications
Many portfolio investors are also find that new mortgage stress-tests, which determine the affordability of the each additional property, can be another good reason to go limited.
Precise claims that 73% of landlords believe that the new rules, which demand rental income of at least 145% of the monthly mortgage payment, are making it harder to get a personal buy to let mortgages. This is another factor driving property investors down the corporate root.
What are the disadvantages of going limited?
In addition to the costs of setting up and managing a limited company, which should not be too scary if you stick to the rules and work with a good accountant, you also need to factor in the higher interest rates on corporate mortgages, which will typically be 1-1.5% higher than a personal buy to let mortgage product.
The reasons for this are very simple. Firstly, there is less competition among corporate lenders and, secondly, because the loan is through a limited company and the directors are not personally liable for the debt, the risks are seen to be higher.
Fees on corporate buy to let mortgage deals also tend to be higher, which can make a big difference on more expensive properties if they are percentage-based, so work with a good mortgage advisor and shop around for the best deal.
Finally, if you are transferring existing personal properties to your company, remember that there will be legal fees and potential Capital Gains tax on any value that has been created since your original purchase.
Should I go down the limited company route?
There is no simple answer to this question. If you're committed to a long-term buy to let investment strategy, then the advantages of a corporate structure are clear and the tax benefits should comfortably outweigh the additional costs and higher interest, especially if you're a higher rate taxpayer.
That said, for a small-time investor with three buy to let properties or less, the costs are likely to outweigh the tax advantages, so the limited company option is probably not for you.
We suggest you take professional advice on whether limited is the right option for you. If you do go for it, make sure it's done right by working with a corporate accountant and specialist mortgage adviser. The savings that they deliver will far outweigh the cost of their services.