Is a limited company buy to let the best option?

Moving buy to let business into a limited company may not be tax advantageous.

Many media headlines have created the impression this is a smart financial decision. The tax situation is complex though and individual circumstances vary. Landlords should speak to a tax specialist before making this decision.

Andrew Turner, chief executive at specialist buy to let broker firm Commercial Trust Limited, writes:

2018 has seen many buy to let landlords incorporate rental property into a limited company structure, believing this will create a more favourable tax position.

All landlords should remember they are running a business and make qualified decisions. In this case, speaking with a tax specialist is essential.

Growing limited company buy to let demand

2018 has seen growing demand for limited company buy to let mortgages. The number of products suitable for this demographic has also increased.

In January, Kent Reliance reported over 70% of buy to let applications had been for limited companies in the first three quarters of 2017.

Precise Mortgages reported that 38% of landlords would buy property through a limited company in the next 12 months.

Moneyfacts.co.uk reported a major increase in the number of limited company products. There were only 17 in April 2013, but 235 in April 2018.

Why are landlords incorporating?

The Government has made significant changes to the taxation of buy to let mortgages. Mortgage interest tax relief, that landlords can claim back, is diminishing.

Since April 2017, mortgage interest tax relief has incrementally reduced from 100%, by 25% each tax year.

Before then, individual buy to let landlords paid income tax on their net rental income, or profits. They could deduct all the interest from mortgages on rental properties.

The rate of relief will fall to 25% in the 2019-20 tax year, before a flat 20% tax credit replaces it in the following tax year.

Because limited companies are taxed differently, many landlords believe they will it will be more tax advantageous for them to switch to a limited company structure, in the light of the mortgage interest relief changes.

Incorporation or individual ownership?

The pros and cons of moving property business from individual to limited company ownership are complex. Individual circumstances will determine the tax position.

Deciding the best way to run your buy to let business needs a conversation with a tax specialist first.

Limited companies pay corporation tax at a current rate of 19% on profits. It may be possible to offset more expenses through a limited company tax return. This might lower your tax bill.

You may also draw income through a limited company dividend. This may prove more tax efficient than tax on individual profits.

So, there are possible tax advantages to limited company incorporation. But, there are other factors that might favour individual property ownership. Considering all factors will create an accurate picture of your best option.

There is less product choice tailored to limited company buy-to-lets, than for individuals. Limited company buy to let products have higher interest rates. This means monthly repayments are usually higher.

For these reasons, the total annual mortgage repayments could cost more than the tax saving.

If the property value increases, moving it into a limited company could create a capital gain.

Buying a new limited company buy to let mortgage could attract costs. These may be: exit charges, stamp duty costs, lender and legal fees and valuation costs. Operating a limited company business may need more administrative work.

The above factors require detailed examination and planning. A tax specialist can help to calculate the tax position for either status.

A specialist buy to let broker can identify the most appropriate mortgage product. They can also outline costs.

So, take advice from a tax specialist, then speak to a specialist buy to let broker.

The limited company buy to let market is growing, with an unprecedented array of choice of rates, terms, incentives and charges. That is where the expertise of an experienced buy to let broker can come into play for anyone wishing to invest in buy to let through a limited company.