In the summer 2015 Budget, the Chancellor announced changes to mortgage interest tax relief. Those changes will start to take effect from the British tax year 17/18. The change means that landlords will no longer be able to deduct all of their mortgage interest when calculating profit. Essentially, this means that landlords who own properties in their own name will be taxed on turnover and not profit.
This raises the question of whether now is the time for landlords to explore acquiring new buy-to-let properties in a limited company, where the interest costs are still allowed to be deducted from turnover before the profit is calculated. Hiten Ganatra, Managing Director at Visionary Finance, helps us explore the pros and cons of both options.
Hiten Ganatra, Managing Director of Visionary Finance
As tax rules change, there appears to be a tipping point at which it becomes more financially advantageous to acquire properties within a limited company, rather than in personal names, but it really does depend on an individual’s circumstances. Consideration needs to be given to the following areas before deciding whether or not the creation of a special purpose vehicle will be viable:
- The current tax status of the individual, i.e lower rate tax payer or higher rate tax payer
- Whether or not the individual has any existing buy-to-let properties
- What future plans the individual has of growing their property portfolio
- The mortgage options available to the individual, based on their circumstances
- If the purchase is a long-term or short-term investment (where they may be looking to buy, keep for a few years and then sell for profit)
- The loan amount required and deposit amount available to the individual
The outcome of the above answers will help to determine whether or not setting up a limited company is a viable option. So, what are the benefits and the challenges of investing in property through a limited company?
Benefits of ownership in a limited company:
- The mortgage interest relief is still available and will be offset against the turnover, before profit is calculated.
- The corporate wrapper allows you to keep your property income and personal income separate.
- New shareholders can be added to the company, thereby giving you the opportunity to ensure efficient tax and succession planning.
- The rental stress tests used for limited company buy-to-lets allows for more generous lending amounts, meaning individuals may be able to borrow more through their limited company than as an personal borrower.
Challenges of ownership in a limited company:
- Limited number of lending options available.
- Mortgage interest rates for limited companies are less competitive than personal mortgages.
- Lenders will require individuals to provide a personal guarantee.
- There is a cost of running and operating a limited company, which will require annual accounts and compliance of Companies House rules.
- Extraction of profits from the limited company.
- Lenders may not be willing to lend to an existing property-related limited companies that already have mortgages with other lenders, restricting options further.
Once the benefits are weighed up against the challenges, a decision can be made as to whether or not the limited company route is the right one. Due to the limited number of lenders in the marketplace that offer limited company buy-to-let mortgages, there is a lack of competition amongst lenders, resulting in the pricing of mortgage deals being less attractive. For example, the cheapest buy-to-let mortgage deal at 75% loan-to-value (LTV) in personal names is currently available at a rate of 1.84% fixed for two years and has a product fee of £1,995. Whereas the cheapest 75% LTV rate for a limited company buy-to-let is coming in at 3.19% fixed for two years, which has a product fee of 1.5% of loan amount.* The limitation in the choice of lenders has created this disparity in pricing, which should be carefully considered before deciding whether the limited company buy-to-let route will be viable.
The final consideration requires looking at the rental income which is likely to be achieved. Following the recent Prudential Regulation Authority (PRA) changes, lenders have introduced new rules for personal buy-to-let mortgages, whereby they are now assessing the individual’s tax banding before calculating the maximum they will consider lending. The same rules haven’t been applied to limited company buy-to-let mortgages, because the mortgage interest costs still remain tax deductible from the company turnover. For example, assume you are a higher rate tax payer looking to purchase a rental investment in your personal name, where the estimated rental figure is £1,400 per calendar month and the purchase price is £350,000. If we consider a simple lending formula, the maximum loan available to you could be as little as £210,000. Whereas, if you purchase through a limited company, the maximum borrowing could be as much as £262,500, giving you an extra £52,500* lending.
The team at Visionary Finance have experience and extensive knowledge of the buy-to-let market, putting them in a very strong position to provide you with informed advice. If this is something you would like to discuss further, then please contact them on 0207 100 4754.
*Mortgages rates and loan amounts are indicative and are correct at the time of printing. Please do not rely solely on these figures for your investment decision.