Should I use a Limited company for my Buy to Let properties?
Most landlords now know about the upcoming restrictions to mortgage interest relief in April 2017. If you don‚Äôt click here.
Since our dear friend Mr Osborne announced his summer budget in summer 2015 holding property in a limited company has been a constant topic of interest for landlords who have mortgages. A business mortgage lender recently carried out a general landlord survey and 30% said they owned a property in a limited company vehicle, up from 22% a year ago.
The main reason is a Ltd company‚Äôs ability to retain profits, thus not pushing the landlord into a higher tax bracket, and mortgage relief restrictions not applying. So does it work?
I have broken it up into downs and ups below, but have to point out that I am not an accountant and this is just my opinion. If you want to be certain then I suggest you contact Cardens Accountants email@example.com
THE DOWN SIDE:
Hands up who loves HMRC? No-one probably and for a good reason. Annual Returns and Company Accounts add a burden in time to you or cost if using an accountant.
Mortgage Rates & lenders
Speaking to firstname.lastname@example.org he commented that historically limited companies have only been used by sophisticated portfolio landlords and individuals now considering the limited company route should discuss their requirements with their accountant before going down this direction.¬† They will also find that there are fewer lenders in the market currently offering products to limited companies and this is often reflected in product costs, be it interest rate and/or application fee.
Lenders will want a ‚ÄòPersonal Guarantee‚Äô which means you will accept liability for the company‚Äôs mortgage debt.
Higher Legal Costs
Due to the often extra workload involved such as anti-Money Laundering Reg obligations and registration details at Companies House it is common for conveyancers to add a fee to cover this.
Property Transfer Costs
Basically this is not worthwhile for properties you already own as it will incur Stamp Duty Land Tax and the additional 3% for a second home (as of 01 April 2016), legal costs, higher rates and likely Capital Gains Tax.
No CGT allowance when selling
Selling as an individual will gift you an ¬£11k CGT allowance, you get nowt with a Ltd company.
Need cash for a new car, holiday, home extension? Any funds released from the company as equity are classed as income and in turn taxed. This is much more straight forward when a private landlord and looking to take advantage of capital appreciation.
THE UP SIDE
For private landlords tax relief will reduce from a maximum of 45% to 20% for higher tax rate payers in scaled amounts from April 2017 to 2020. This does not affect Ltd companies so for higher rate tax payers this vehicle provides lower tax than as a private owner. This is good.
If you compare Corporation Tax (20%) to a higher rate tax payer (40%) it‚Äôs quite clear which has the more favourable tax liability. You can control how much is retained by the company control on personal income can reduce your liability.
Directors Loans can be used to draw funds out where investments have been made (EG mortgage deposit). Ability to carry this out will vary with lenders.
Income from a Ltd company would be classed as an ‚Äòadditional income‚Äô on applications for credit and mortgages held in a Ltd company lenders are unlikely to take these into account meaning your personal borrowing is not affected, increased even.
The new tax free Dividend Allowance of ¬£5,000 (April 2016) has replaced the Dividend Tax Credit and means a potential tax free dividend income from your investment properties. Flight to the Bahamans thank you very much.
No tax on reinvestment
As there is no income tax on retained profits you can easily re-invest and grow your portfolio. Although Corporation Tax (20% but reducing to 18% by 2020) is due on profits it is lower than higher income tax rate of 40%.
You can use the Ltd company to expand your portfolio over and over again.
Directors and Shareholders can be changed fairly easily which can be advantageous in changing circumstances EG adding an investor. Changing ownership to a property can be a lot more time and money consuming.
The property/ies will be owned by the Ltd company which can be very helpful with credit ratings. Picture a tenant who doesn‚Äôt pay any bills and inevitably the suppliers come to you for payment as the private owner of the property, and a potential black mark on your credit rating. No more!
As you can see there are many advantages and disadvantages to buying in a Ltd company. The best advice to give is for you to speak to your accountant or tax advisor as to the best way forward for you.
If you do go down the Ltd route then make sure you only use it for buying and renting out property, Lenders often call this a ‚ÄòSpecial Purpose Vehicle‚Äô. It can affect your ability to obtain a mortgage if the company starts to sell beer or garden gnomes also.
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