Sarah Tucker and Shelley Walker discuss Limited Company Buy to Let Mortgages.
What is a Limited Company Buy to Let mortgage?
It’s where you set up a Limited Company for the purpose of buying, selling and renting property. You buy a property in the name of the company rather than your own name.
You will be the Director of that Limited Company – on your own or with up to four Directors. The Limited Company owns the property rather than you as an individual.
Why would you want to own a property in a Limited Company rather than as an individual?
Essentially, it’s around tax. Limited Company purchases really came about following government reforms around tax for private landlords – and it is especially relevant if you are a higher rate taxpayer. The tax breaks via a Limited Company can be preferential to buying in your own name.
As mortgage brokers we are not qualified to give tax advice – you need an accountant for that.
What did the government’s reforms mean for the average landlord?
Previously, your mortgage interest costs could be deducted as an expense before your tax was calculated. Most landlords tend to have an interest-only mortgage, which meant that all of that cost could be written off. There could be other deductions as well, such as for wear and tear on the property or other property-related expenses.
The reforms removed the mortgage interest costs as an allowable expense and put in other criteria. Paying tax on all of your gross rental income is significantly higher than the net rental income after tax (after your mortgage interest payments). Given that the mortgage is generally a landlord’s biggest expense, this is very significant.
How does a limited company Buy to Let mortgage work compared to a personal Buy to Let?
The main difference is cost. There’s a narrower market of Buy to Let lenders for limited companies and the interest rates they charge are generally higher than for an individual.
Different lenders may restrict the amount of people that can be on the mortgage, whether it’s in personal names or a Limited Company.
Plus of course there’s the tax treatment – the amount you will declare and pay back to HMRC.
How do lenders assess your income?
Mortgage lenders will look at individuals’ income within the company. Some have specific requirements around minimum income levels, even within a Limited Company. That’s the same if you buy in personal names.
In terms of tax, there are additional stamp duty costs when you’re buying property as a landlord, plus you’ll pay Corporation Tax on the profits that you’re making each year.
If you want to draw money out of that limited company, you will also pay tax on any dividends or salary that you’re giving yourself.
Do you have to pay stamp duty as a Limited Company?
People often think that buying through a Limited Company removes the need to pay stamp duty, particularly the extra 3%. But unfortunately, that isn’t the case, the extra 3% is payable both by individuals and companies.
One difference is the way that capital gains tax is treated – but again this starts going into the realms of tax advice.
How can I avoid making mistakes when setting up a Limited Company for Buy to Let?
The main thing to focus on is the SIC codes. When you set up a Limited Company, you have to classify it according to HMRC’s definitions. You need to select the correct SIC codes that pertain to it being an ‘SPV’ – a Special Purpose Vehicle, for buying and selling and potentially renting out properties.
Many lenders state in their criteria that they want to see this specific SIC code on a Limited Company.
If you’re unsure on this, get in touch with us and we can help. Last week we had to help a client to remove a SIC code because a particular lender wasn’t happy with it. Do check this with a broker as well as an accountant, because accountants won’t necessarily know what a lender will require for a Buy to Let mortgage deal.
Are the documents required any different for a limited company?
It only differs once you have four or more properties which puts you into the realms of portfolio lending. At this point lenders tend to want more information: a business case, a spreadsheet of your properties and how much you are making from them.
There can also be a focus on personal guarantee. Lenders may want reassurance that in the event that you fold your company in the future, you still have some liability towards that mortgage – that is, they will still receive the mortgage repayments. You will need to evidence some level of wealth or income to give them that reassurance.
This does vary lender to lender and not everybody even requires a personal guarantee.
How much deposit will a Limited Company need?
A 20% or 25% deposit is the norm for a Buy to Let mortgage. The higher the deposit, the better the rates you receive. The lender will also perform stress tests around the finances to make sure that the rent stacks up against the mortgage.
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When looking at Buy to Let properties, what is the most important factor?
It’s a combination of factors, for me. There’s something about the property type and location. I always want to buy something that I would be happy to live in, either now or as a 25 year old, pre-children version of me.
I always want direct access to a garden, and I want to check that I have the right tenant. I don’t want to have properties in nice areas where the tenant might cause me problems.
And then there’s a consideration about how much effort I want to put in. Will I buy a ‘fixer upper’ or something that’s ready for someone to move into straight away? Finally it’s about calculating the mortgage payments against the rental income, and how that works alongside all the other factors.
What are the pros and cons of setting up a Limited Company?
The main pros are:
- The restrictions on mortgage interest relief don’t apply to a Limited Company
- Corporation tax rates are lower than income tax rates for most landlords. The top rate of corporation tax will increase to 25% from April 2023, but only applies on profits over £250,000. The rate for small profits under £50,000 will remain at 19%
- More options for tax planning
- Limited liability protection to landlords – for example if tenants don’t pay utility bills.
The cons are:
- Additional tax on income and dividends taken out of the company
- Individuals can benefit from Capital Gains tax allowance on profits when they sell a property, whereas limited companies can’t at the moment. That allowance is £12,300.
- Additional admin considerations and costs in setting the company up, such as reporting and accounting.
- Transferring an existing property from your own name to a limited company is complex and subject to costs.
How do I decide if it’s worth setting up a Limited Company?
This will depend entirely on your own unique personal situation and it’s important to seek advice and look at the specific costs that will apply to you.
We don’t specifically advise people whether to do it or not, but we can certainly help you consider what to look at and how to compare your options.
Thank you to Shelley Walker for joining Sarah Tucker on The Mortgage Mum Podcast for this insightful podcast episode.
If you have any questions, please reach out to Shelley or myself. We’re both active on social media, and you can also reach us through the contact form on our website.
Your property may be repossessed if you do not keep up with your mortgage repayments. The Financial Conduct Authority does not regulate some Buy to Let Mortgages.