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“ As a limited company is a separate legal entity , normally the lenders ’ stress testing is more favourable ”
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Considerations of Limited Company Buy-to-Let ( BTL )
There are pros and cons to purchasing a buy-to-let in a limited company versus under a personal name , but the choice depends entirely on the individual circumstances of the borrower .
An experienced commercial mortgage broker will be able to guide you on your options and give you more insight and information on what will be the best option for you .
Why purchase a BTL using a limited company ?
In 2017 , the government set out changes in the Budget , including a reduction in the amount of tax relief available for interest on BTL mortgages , being gradually reduced until only basic rate 20 % is available ( by 2021 ). This means that landlords will pay tax on their entire rental income and will be unable to deduct the cost of mortgage interest . Higher rate tax payers will therefore pay a lot more tax and possibly to
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the point where they make no profit . This has led to an increase in the number of landlords purchasing BTL investments in a limited company , due to the fact that limited companies pay corporation tax , currently at 19 % but reducing to 17 % in April 2019 .
Differences in lending As a limited company is a separate legal entity , normally the lenders ’ stress testing is more favourable and they tend to relax this when it comes to rental calculations . ( Usually rental income must cover 125 % of mortgage payments , whereas this is 145 % when lending is completed in a personal name .) However , mortgage costs are often higher for a limited company and additional stamp duty costs need to be taken into consideration .
Owners of more than four buy-to-let properties ( portfolio landlords ) will have to disclose all property details at the end of September meaning that the portfolio will be assessed as a whole . If one property performs less well than others this will
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affect the underwriting of the whole portfolio .
Advantages
• Mortgage interest tax relief
• No tax on dividends up to £ 2000
• No income tax on retained profits allowing more funds to re-invest
• Corporation tax is lower than income tax
• Personal advances made to the limited company can be drawn back out of the company via Directors loans
• Lenders tend to relax the stress testing when it comes to rental calculations
Disadvantages
• No Capital Gains Tax allowance when a company sells a property ( individuals have £ 11,100 )
• Administration costs such as preparation of company accounts , filing at Companies House , initial set up costs , accountants fees
• Possible higher mortgage rates and reduced number of lenders
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THE BUSINESS EXCHANGE 2018 11 |