Having made the decision to invest in buy-to-let property, you need to make a further decision – whether to purchase property as an individual or to set up a limited company. A limited company can be either a special purpose vehicle (SPV), which will only buy, sell and hold your buy-to-let property, or – if it receives income from any other business or holds assets other than your buy-to-let property – a trading limited company.
While your final decision is likely to take into account a host of issues including income tax, capital gains tax and your future plans for your property portfolio, it’s worth acknowledging that there are pros and cons either way.
The positives of limited company buy-to-let
The main benefit of limited company buy-to-let relates to tax liabilities. Changes announced in the government’s 2015 Budget mean that by 2020 landlords – including those who are higher or additional rate taxpayers – will only be able to claim tax relief for mortgage interest at the basic rate of 20%. The change will be phased in from April 2017. What it means is that many landlords who are not operating as a limited company will effectively pay more tax on the rental income they receive, which could in turn have an impact on both cash flow and overall profitability.
However, changes to corporation tax rates are also being phased in. Limited companies pay tax on trading profits, and rates will drop from the current level of 20% to 19% from April 2017, and to 17% from April 2020. What that means is that you will pay less tax on annual profits (up to £300,000) if you operate as a limited company.
As far as drawing money out of the business is concerned, you’ll pay tax on income or dividends at whatever the prevailing rate is at the time – currently up to 45% for salary and 38.1% for dividends, although both income and dividends have a qualifying personal allowance before tax is due (presently £11,000 for income/salary and £5,000 for dividends). However, if you leave profits in the business, perhaps using the money to refurbish or expand your property portfolio, then you will simply pay the relative rate of corporation tax.
While some lenders now offer buy-to-let mortgages to landlords who operate their business as a limited company, there are still many that don’t. For those that do, it should be noted that most require the company to be a special purpose vehicle, rather than a trading company. Many buy-to-let lenders also require the business to hold the appropriate SIC (“standard industrial classification of economic activities”) code for property letting.
Limited company buy-to-let mortgages can be more expensive than an equivalent personal buy-to-let mortgage as far as arrangement fees and interest rates are concerned – this is at least in part because the pool of potential lenders is smaller so there is less competition to drive rates down.
There may be additional administrative costs related to operating as a limited company, and in some instances it can be more complicated to transfer property and assets. When a property is sold via a limited company, it is subject to corporation tax, rather than capital gains tax. While the rate of corporation tax is lower than the rate of capital gains tax, an individual benefits from the capital gains tax allowance, which does not apply to a company.
Weighing it all up
There are some clear advantages to opting for a limited company buy-to-let mortgage, but it’s important to consider the broader perspective and to take into account your own personal circumstances. While the final decision is yours and yours alone, there’s a benefit in taking advice from experts – a qualified accountant or specialist tax adviser will be able to provide guidance as to which options are right for you from a taxation point of view. For more information about limited company buy-to-let mortgage options, contact us today.