The changing tax landscape has been a big driver to the recent growth in limited company buy to lets. These have impacted landlords who own properties in their own name and pay higher rate of tax. Under new rules, landlords cannot offset mortgage interest costs as an expense. This has instead been replaced by a 20% tax credit on all rental income. As a result, more and more landlords are considering the limited company option for new investments and remortgages in an effort to reduce their tax bill.
What are the benefits?
- More tax efficient. Private landlords have had their tax relief significantly cut in the recent years. This does not apply to properties held under a limited company. 100% of mortgage interest can be offset as an allowable expense.
- Tax-free dividend relief up to £2000. The Dividend Tax Credit means company shareholders can potentially take £2,000 per year in dividends tax-free.
- Reduces personal liability through legal separation. The company and its finances are legally separate to the people who run it – which limits the level of personal liability an individual can face.
- Possibly quicker to grow buy to let portfolio. This is if you keep the profits within the company and reinvest. There’s no income tax on profits retained within the company, so there’s more cash to reinvest. Corporation tax is payable on trading profits, but this is lower than higher rate income tax.
What are the drawbacks?
- No Capital Gains Tax allowance. Unlike a private individual, companies do not qualify for capital gains tax relief on the proceeds of a property sale.
- Limited company running costs. Operating a limited company comes with fees for things like preparing annual accounts, Companies House filings and other accounting related activity.
- Mortgage rates are slightly higher for limited companies. However, this trend is changing as more lenders have started to offer limited company products. Double taxation applies if taking a salary and dividends. In a limited company, corporation tax is applied on profits. If you then take the profits out, either as a salary or dividends, then this will be subject to income tax.
What is a Special Purpose Vehicle (SPV)?
- Limited companies need to be set up as a Special Purpose Vehicle (SPV). Lenders will only lend to a SPV.
- SPV are set up to hold property and nothing else. This is usually to isolate financial risk. Within mortgage lending, SPV is different to a trading company in that a trading company has a primary activity other than owning property.
- A newly incorporated SPV can be used. Most lenders do not require a limited company to have been established for a minimum time.
- SPV have specific Standard Industrial Classification (SIC). One or more of the following codes: 68100, 68201, 68209, 68320 is required for a SPV to be considered by lenders.
