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Is Limited Company Buy to Let right for me?

Updated: Mar 15

Are you considering rising to the challenge of investing in property using a Limited Company Buy to Let (BTL) Mortgage? It is true that this can offer greater tax advantages than purchasing a buy-to-let property personally, but there are also some important considerations when going down this route. Interest rates may be higher and not all lenders currently support Limited Company BTL, so it’s essential to know what makes them different before you make an informed decision about which route might be best for you.


In this article we will explain everything from what they are and why they have become more popular recently to their eligibility criteria and other details that could help when making your selection. Read on now as we reveal all the need-to-know information about Limited Company BTL Mortgages…

Why is using a Limited Company beneficial for Buy-to-Let investors

Investing in a buy to let property through a Limited Company or Special Purpose Vehicle (SPV) can significantly improve your tax efficiency. Unlike purchasing in your own name, where you will be taxed at your highest rate, buying through a limited company allows you to pay corporation tax on the profit. So this can be particularly advantageous if you are a higher rate taxpayer. Not only can you offset more ongoing running costs against income, but your limited company can also be the legal owner, keeping your personal and business assets separate.


Lastly, if you're looking to invest with others, this option allows for joint ownership within the company.


How to set up an SPV for your Buy to Let Property

Setting up your SPV Company in the UK is a breeze. Within a few hours, you can get it done by visiting the Companies House website or asking your accountant for assistance.


Here's what you need to know:

  • You must appoint at least one director and one shareholder

  • Provide the company name, registered address along with details of the directors

  • Clearly define the business of the company in the Memorandum of Association (MOA) and Articles of Association (AOA)

  • You can add additional directors and/or a company secretary

  • Each shareholder should be allocated a percentage share of the company

  • Shareholders with more than 25% ownership are considered persons with significant control (PSC)

  • The names, dates of birth, service addresses, and nationalities of PSCs will be listed on the public register

Lastly, to ensure you meet the criteria of certain lenders, they may require your company to fall under specific Standard Industry Classifications (SICs). These classification codes include:

  • 68100: Buying and selling your own real estate

  • 68209: Letting and operating real estate that you own or lease

  • 68320: Managing real estate on a fee or contract basis

To get the best guidance for your specific situation, it's always wise to consult a qualified accountant. Additionally, consider speaking with your tax adviser to determine if it would be beneficial for your company to be classified as a Special Purpose Vehicle (SPV).


Some Advantages of Limited Company Buy to Let


Section 24 doesn’t apply:

In 2015, Section 24 was introduced, bringing a significant change to the tax law impacting tax relief for landlords. This amendment was implemented gradually and officially took effect in April 2020. By using a limited company, 100% of the mortgage interest can be offset, resulting in reduced profits and lower taxes.


Savings for Higher Rate Tax Payers:

If you're a higher rate taxpayer or own multiple properties, you may benefit from a significant tax saving. When you personally own a property, the rental profit is added to your other earnings and taxed as income tax.


However, if you hold properties in a limited company, the rental profits are taxed at the current rate of corporation tax, which is typically half of the higher rate of income tax. This can lead to substantial tax advantages for you. Click here for the latest corporation tax rates.


Expand your portfolio:

If you're a higher rate taxpayer wanting to grow your portfolio, you'll discover a tax-saving opportunity by using a limited company. By keeping your profits within the company, you can fund future purchases without paying income tax (until you withdraw the profits). This strategy safeguards your earnings from tax liabilities, allowing you to repay any debt and expand your property portfolio more quickly.


More Flexibility:

As a company director, you have the freedom to decide how to use your profits. You can choose to invest in more properties, save in a tax-efficient pension, or strategically distribute profits through dividends. This flexibility offers advantages for your personal tax planning compared to owning properties individually.


Better Estate Planning:

Owning property within a company offers greater flexibility for inheritance tax planning.


When you pass your business down to your family, transferring a limited company is easier than transferring a privately held property. Additionally, by keeping the property under the company's ownership, you can protect it from stamp duty, inheritance tax, and capital gains tax obligations.


Depending on your company's structure, you can even include your children and grandchildren as shareholders.

Disadvantages of Limited Company Buy to Let


Higher mortgage rates & fees:

Lenders currently charge higher interest rates and fees for limited company buy to let mortgages. However, when it comes to stress testing, they actually tend to be more lenient compared to lending to you as an individual.


More Expensive for Basic Rate Taxpayers:

If you only have one or two properties and pay basic rate tax, running a limited company may not be worth it. The costs may outweigh the benefits. Basic rate taxpayers are less impacted by Section 24. If you're satisfied with your rental profits and portfolio, it might be best to stick with your current setup.


Legal Costs & Responsibilities:

As a company director, you have important legal and financial obligations. It is your responsibility to maintain accurate company and financial records and to submit the relevant accounts and returns to Companies House and HMRC. You may want to invest in an accountant to handle these tasks for you.


No Capital Gains Tax Allowance:

You will benefit from the CGT allowance on profits when you sell a property that you own, whereas you will not qualify for this if buying and selling property via a limited company.


Additional Costs:

When establishing a limited company, it is important to consider the additional expenses and obligations that come with it. These include:

  • Preparing accounts - a mandatory process

  • Paying Corporation Tax

  • Submitting filings to Companies House

  • Covering legal fees

  • Conducting annual audits (if necessary)


Interest Cover Ratio (ICR) and how it affects your mortgage

Most mortgage lenders will want to see monthly rent of 125-145% of the monthly buy-to-let mortgage payment - known as 'stress testing'. Income Coverage Ratio (ICR) shows the ratio to which the rental income covers the mortgage payments, tested at a representative interest rate, usually around 6% to 7% but changing as interest rates move up and down. This will be lower with some lenders if you’re happy to lock into a five year fixed interest rate.


As we say, lenders 'stress test' this rate on your expected loan at their required coverage percentage, usually 125-145%. Some lenders also stress at the highest level if you’re a higher rate tax payer.


However, when it comes to limited company buy-to-let mortgages, lenders are starting to offer more favourable ICRs, which can help increase the amount they are willing to lend you. Here’s an example of how the ICR will affect the mortgage amount:


Property Value = £300,000

Rental income: £1300pcm rent x 12 months = £15,600 per annum

Mortgage: £225,000 x 7% = £15,750 per annum

ICR = £15,600 / £15,750 = 99% Coverage

Result = You Will Need More deposit!


If your chosen lender is applying an ICR of 125%, more commonly used for Limited Company Buy to Let mortgages, and using the above example as a guide, you would need to find an additional £46,750 towards your deposit, as follows:


Property Value = £300,000

Rental income: £1300pcm rent x 12 months = £15,600 per annum

Mortgage: £178,250 x 7% = £12,477 per annum

ICR = £15,600 / £12,477 = 125% Coverage

Result = Lenders ICR is satisfied


The above examples are intended to serve as a helpful guide, but it's important to note that mortgage lenders regularly update their criteria, including their ICR’s. Currently, in order to help landlords maximise their borrowing potential, some lenders are offering lower fixed rates. However, it's important to consider that this may come with a higher upfront arrangement fee.


Is Interest Only a good idea?

Buy-to-let mortgages are typically set up on an interest-only basis, meaning that the monthly mortgage payments will consist solely of the interest on the loan rather than paying off the loan itself. If you are seeking immediate income from your property investment, you will benefit from this as interest payments are lower than those that are set up on a repayment basis.


Interest only could also help you save towards purchasing another investment property sooner.


NOTE: it is important to remember that when the mortgage term is up, you still owe the total value you borrowed, leaving you to sell the property to settle up or repay the loan by other means.


Interest Only & Repayment Monthly Costs

The below table outlines the likely cost of each option and is a simple indicative example as interest rates / terms will always vary from lender to lender. In this example we have assumed that the property will generate a monthly rental income figure of £1300.

Repayment

Interest Only

Property Value

£300,000

£300,000

25% Deposit

£75,000

£75,000

Mortgage

£225,000

£225,000

Mortgage Term

25 Years

25 Years

Interest Rate (indicative)

5%

5%

Monthly Payment

£1315

£937


In conclusion, limited company buy to let mortgages offer an increased level of tax efficiency, however they also come with a higher level of complexity and risk. Before making a decision, engage with a mortgage broker as they will research lenders offering this type of mortgage and look into interest rates and eligibility criteria carefully.


Ultimately, finding the right mortgage for you may require more research and a little bit of effort, but could be worth it in the long run. If done properly, leveraging the benefits offered by this kind of mortgage can be highly lucrative for landlords. If you would like some personalised advice on Limited Company BTL Mortgages why not get in touch today and we will always try to answer any questions you may have.


Want to chat further about limited company buy to let mortgages? Call us now and we will be delighted to assist you.


Please note that we are not tax experts, but we've gathered information from reliable online sources. Our goal is to provide you with helpful insights. For personalised tax advice, we strongly suggest consulting a qualified Tax Adviser / Accountant. They can guide you towards the best path for your specific situation.


Your property may be repossessed if you do not keep up repayments on your mortgage.


Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.


Published by Beechwood Mortgages Ref: 219335 with review and approval from Stonebridge Mortgage Solutions Limited who is authorised and regulated by the Financial Conduct Authority Ref: 454811.

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