Buy to let mortgages – limited company vs individual

The next phase of PRA changes across buy to let mortgages are looming. From September 30th 2017, landlords with four or more buy to let properties will be treated as portfolio landlords and will face tougher affordability checks. These will include landlords needing to submit more detailed supporting information, such as business plans, cash flow forecasts, bank statements, SA302s, tax returns, income and expenditure sheets etc.

Below are a few important points you should take into consideration when discussing these changes with your clients. There is no straightforward answer when deciding whether portfolio landlords should adopt a limited company structure or keep their portfolio in an individual name. The best way forward will be unique to each client and their personal circumstances and future intentions should be taken into account.

Advantages of Borrowing Through a Limited Company

  • The limits on mortgage interest relief only apply to individuals.
  • A company can continue to offset 100% of mortgage interest costs.
  • The rate for Corporation Tax is lower than for individuals, dropping to 17% by 2020.
  • Profit can be retained within the company e.g. for reinvestment.
  • The new Dividend Tax provisions mean that the first £2,000 is tax-free. Dividends above this will be taxed at 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
  • Companies do not pay Capital Gains Tax (CGT).

Disadvantages of Borrowing Through a Limited Company

  • The additional cost of running a Limited Company – such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable. A client’s accountant may also charge higher fees when preparing accounts for Limited Companies.
  • Most lenders who offer limited company buy to let mortgages have separate products which tend to be priced higher than those for individuals. However, limited company products are improving and we are seeing less price difference between limited company and individual product ranges.
  • Reduced choice of lenders and mortgage products.

Transferring an Existing Portfolio to a Limited Company Structure

Caution should be applied if considering transferring an existing portfolio from an individual name into a Limited Company. Your client would be liable to pay Capital Gains Tax and Stamp Duty Land Tax (SDLT) on the transfer. On the other hand, this decision may depend on your client’s future intentions. Landlords who want to expand their portfolio may be willing to carry these one-off costs to do so, in order for them to benefit from paying a lower amount of tax etc in the future.

Example purchase price in 2001: £250,000

  • Value in 2016: £1.1m
  • Stamp duty is payable on the current market value (assuming there is a connection between the parties) = £85,550
  • Capital Gains Tax payable on gain less annual exemption assuming gain is taxed at top slice at 28% = £234,920
  • Total = £320,470

If you need support when reviewing the best options for clients, then contact our Specialist Team:

Call 01702 538 800 or email info@ingard.co.uk