Recent tax changes have seen more and more landlords buying buy-to-let homes through limited companies. Here Doug Hall, director of mortage broker 3mc talks about how to decide what’s best for you.
I have spent a lot of time speaking at roadshows, forums and seminars about an issue that’s been popping-up with greater regularity recently: limited company buy-to-lets.
The new tax rules mean that buying a buy-to-let property within a limited company is now far more popular.
For example, 24% of all the buy-to-let business processed by 3mc in 2016 was done via a limited company.
In the first five of months of this year, that figure had shot-up to 43% and I wouldn’t be surprised if it continues to rise in the second half of the year.
What’s more, Moneyfacts has recently confirmed that the number of buy-to-let mortgage products available for purchasing a property via a limited company has more than doubled during the past 12 months, from 133 deals 12 months ago, to 313 available today, which represents 20% of the total market.
Buying additional properties within a limited company can make a lot of sense, particularly for higher rate tax-payers and if you’re contemplating purchasing additional properties, then it may be worth considering.
However, please do seek advice from a tax accountant. Purchasing additional properties within a limited company may be financially worthwhile and a tax specialist will be able to look at your personal circumstances and advise what’s best for you and what impact it will have on your profitability.
In order to make a meeting with your tax adviser as productive as possible, I suggest you ask your mortgage broker to give you two sets of quotes: one for a limited company buy-to-let and one for a personal buy-to-let.
You can then consider both with your tax adviser and make an informed decision as to which deal is best for your circumstances.
Do bear in mind, however, that it’s no longer a case of opting for the cheapest rate.
For example, it may be that a 3.5% deal for a limited company may be a better option than a 2% deal for an individual, when all factors are taken into consideration, especially the impact of taxation.
It’s also worth noting that, under the new Prudential Regulation Authority (PRA) rules, a lender has to assess the impact of future tax changes on a borrower’s affordability.
We are seeing some lenders assessing applications using a minimum interest coverage ratio (ICR) of 125% for a limited company, whereas for individuals, especially higher rate taxpayers, they are using ICRs of up to 145%.
The impact of this can be very significant.
For example, based on a rental income of £900 per month (and the ICR being based on the pay rate rather than a notional rate), an ICR of 125% at 3.68% on a 5-year fix will allow a maximum loan of £234,700.
However, an ICR of 145% at 3.68% will allow a maximum loan of just £202,300.
The Mortgage Works has a tax change calculator which is a free download on its website (www.themortgageworks.co.uk), which will help you better understand the implication of the tax changes.
The first tax bill that includes the effects of the new tax changes won’t be due for final payment up until January 2019 (for the April 17/18 tax year), but you need to understand now what the effects of the changes are going to be.
A question regularly put to me about limited company buy-to-let is how long a company has to have been trading for in order to satisfy lenders’ requirements.
The answer is that the company can be brand new.
It’s easy enough to set-up a new limited company; they can be bought ‘off-the-shelf’ and that’s perfectly acceptable to most lenders.
The key point is that a limited company is simply a tax wrapper; the lender will underwrite the company’s directors rather than being concerned about the trading record of the company.
Most landlords purchase property in what’s referred to as a ‘Special Purpose Vehicle’ (SPV) property company, but we have also seen an increase in applications to buy property within existing companies, where other trading activities are already taking place.
If you’re a business owner generating surplus cash, you may view investment property as an attractive option and there’s nothing to prevent you from purchasing property within your existing business.
In summary, do ensure you understand as soon as possible the implications of the tax changes on your property investments, especially if you’re a higher rate taxpayer.
Purchasing additional property within a limited company may make sense, but get alternative mortgage quotes for both limited company and personal buy-to-lets and seek specialist tax advice before coming to a final decision.
For further information on buy-to-let mortgages for both individuals and limited companies please contact RLA Mortgages on 0844 858 4420 or visit the website www.rlamortgages.co.uk