Limited company buy-to-let is very common in the current climate.

Recent research from Bembridge (2021) conveys the common advantages that are enticing investors (60%) to purchase their rental properties utilising a limited company. Generally known as ‘incorporations’, this practice enables landlords to purchase rental properties while benefitting from attractive tax rates. Discussed below are the characteristics of limited company buy-to-let.

Tax savings

Bembridge (2021) states that in 2020 compared to 2017 when landlords were able to “deduct mortgage interest costs and expenses from their rental income when declaring their profits to HMRC” this was scaled back from one hundred percent to zero, with landlords only receiving a reduction of 20% mortgage interest costs on the final tax bill.

For example, someone buying a property worth £250,000 with a 75% mortgage and a rental income of £1,000p/m would pay around £1,033 in tax p.a. In contrast, a lower rate taxpaying could potentially pay 42% more (£1,463 p.a.), while a higher rate taxpayer could pay 274% more (£3,863)

How you’re taxed

As a limited company, rather than paying income tax, you will be subject to 19% corporation tax and 32.5% dividends tax. With ‘Dividends’ defining the money that you pay yourself based on the cash generated, you will be entitled to withdraw £2,000 tax free per annum. 

Stamp Duty

For landlords operating as individuals who whish to transfer to a limited company buy-to-let, the major drawback is that landlords will have to pay the stamp duty again, along with the three percent surcharge, as transferring to a limited company is effectively buying the property a second time. Other charges which are required to operate a limited company includes: capital gains tax, legal fees and valuation charges.

Mortgage Rates

Mortgage lenders have not been as quick to adapt to limited company buy-to-let. On average, only 25% of mortgages within the UK are available to these limited companies, with interest rates being higher. However, more positively, you could potentially borrow 125% of you rental income with a limited buy-to-let mortgage, in contrast to the 145% for an individual higher rate taxpayer.

To discuss your mortgage options further, please contact our independent mortgage advisors: Cait – cait@cps-property.com or 02890958888 and Aoidhan McGuinness – aoidhan@cps-property.com or 02837528888.

References:

Bembridge, R. (2021) Why landlords use limited company buy-to-let. [online] Available at: https://propertyinvestorpost.com/why-landlords-use-limited-company-buy-to-let/. [Accessed 21 June 2021].

Millman, M (2021) Sharp rise in landlords using companies to buy rental properties. [online] Available at: https://www.simplybusiness.co.uk/knowledge/articles/2021/02/record-number-of-buy-to-let-limited-companies/. [Accessed 22 June 2021].