Limited Company Buy To Let Guide

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Limited Company Buy To Let: Your Comprehensive Guide

Investing in property can be a lucrative venture, but navigating the buy-to-let mortgage market can be challenging. One option that’s gaining traction among savvy investors is the Limited Company Buy To Let approach. This strategy offers advantages, especially for higher-rate taxpayers or those looking to build a substantial property portfolio.

Understanding Limited Company Buy To Let

A Limited Company Buy To Let is essentially a mortgage product for companies rather than individuals. It allows investors to purchase rental properties through a limited company structure, rather than in their personal name.

This approach has gained popularity in recent years due to changes to tax relief on mortgage interest for individual landlords. According to recent buy-to-let landlord statistics , a typical UK landlord can expect an annual rental income of £8,256 per property. However, how this income is taxed depends on whether the property is owned personally or through a company.

Key Features of Limited Company Buy To Let

Properties are owned by the company, not the individual.
Rental income is subject to corporation tax, not income tax.
Mortgage interest can be deducted as a business expense.
Potential for more tax-efficient profit extraction.
Easier to manage multiple properties under one structure.

Tax Implications of Limited Company Buy To Let

One of the primary motivations for choosing a Limited Company Buy To Let structure is the potential tax benefits. Let’s explore how this works:

Corporation Tax vs Income Tax

When you own a rental property through a limited company, the profits are subject to corporation tax rather than income tax. The corporation tax rate stands at 19% for companies with profits under £50,000, which is significantly lower than the higher (40%) and additional (45%) rates of income tax.

Mortgage Interest Relief

Perhaps the most significant advantage is the treatment of mortgage interest. Companies can deduct the full amount of mortgage interest as a business expense before calculating taxable profit, unlike individual landlords. This difference can lead to substantial tax savings, especially for highly leveraged portfolios.

Dividend Taxation

Investors can take advantage of dividend taxation rules when extracting profits from the company. For the current tax year, there’s a tax-free dividend allowance of £1,000 , with additional dividends taxed at lower rates than income tax.

Setting Up a Limited Company for Buy To Let

If you’re considering this route, you’ll need to set up a limited company. This process is straightforward and can be done online quickly.

Steps to Set Up Your Company

Choose a unique company name.
Register with Companies House online .
Determine your company’s directors and shareholders.
Select the appropriate SIC code for property rental businesses.
Set up a business bank account.

It’s crucial to use the correct Standard Industrial Classification (SIC) code when registering your company. For buy-to-let businesses, the most common codes are:

68100 – Buying and selling of own real estate.
68209 – Other letting and operating of own or leased real estate.
68320 – Management of real estate on a fee or contract basis.

Pros and Cons of Limited Company Buy To Let

As with any investment strategy, advantages and disadvantages must be considered:

Advantages

More tax-efficient for higher and additional rate taxpayers.
Easier to build and manage a large property portfolio.
Greater flexibility in profit reinvestment.
Potential for smoother succession planning.
Limited liability protection for personal assets.

Disadvantages

Potentially higher mortgage interest rates.
More complex accounting and reporting requirements.
Additional costs for company formation and management.
Possible stamp duty implications when transferring existing properties.
Less beneficial for basic rate taxpayers with small portfolios.

Securing a Limited Company Buy To Let Mortgage

Obtaining a mortgage for a Limited Company Buy To Let can be more challenging than for individual landlords. Lenders have stricter criteria and may offer slightly higher interest rates.

Key Lending Criteria

Minimum 25% deposit (some lenders require up to 40%).
Rental income typically needs to cover 125-145% of mortgage payments.
Personal guarantees from directors are often required.
Company must be set up as a Special Purpose Vehicle (SPV).
Directors’ personal income and credit history are considered.

Not all lenders offer Limited Company Buy To Let mortgages, so working with a specialist broker can be invaluable in finding the right product.

What do lenders require for limited company buy to let mortgages?

When it comes to securing a buy-to-let mortgage through a limited company, the eligibility criteria are quite similar to those for a standard buy-to-let mortgage. However, there are a few key differences and additional considerations that potential borrowers should be aware of.

Deposit Requirements

For both personal and limited company buy-to-let mortgages, the minimum deposit typically ranges between 20% and 25% of the property’s value. However, some lenders may require a deposit of 30% or higher, especially for limited company applications, reflecting the perceived higher risk.

Rental Income

Lenders usually require that the expected rental income from the property covers at least 125% of the mortgage payments. This ensures that the property can generate enough income to cover the mortgage and other associated costs, providing a safety net for the lender and borrower alike.

Personal Income

For private landlords, personal income plays a crucial role in mortgage eligibility. Similarly, in the case of a limited company buy-to-let mortgage, the personal income of the company directors may be scrutinized. Lenders often want assurance that directors can cover mortgage payments during periods when rental income is low. Alternatively, some lenders might accept proof of substantial personal savings instead of a minimum income requirement.

To find out more about what documents you need if you are self employed and applying for a Buy To Let… Check out this article.

Credit History

Both your personal credit history and that of the limited company will be examined during the mortgage application process. While some lenders may overlook minor credit issues, a history of significant adverse credit events can severely impact your ability to secure a mortgage. Maintaining a good credit history is essential. If you have bad credit check out this article on Buy To Let Bad Credit Mortgages.

Age of Directors

The age of the directors can also be a factor. Some lenders may be hesitant to approve a mortgage if the directors are past retirement age unless there is evidence of other reliable income sources that can cover the mortgage payments.

Other Property Ownership

If you or your company already owns multiple properties, you might face challenges in securing a new mortgage, especially through high-street lenders. Lenders typically view portfolio landlords (those with four or more properties) as higher risk. In such cases, specialized lenders who cater to portfolio landlords may be necessary.

Additional Considerations for Limited Company Buy-to-Let Mortgages

Company Purpose: The limited company must be established with the specific purpose of buying, selling, or managing property. Lenders prefer companies that are solely focused on property-related activities.
Incorporation Length: While some might worry about the age of the company, most lenders do not require the company to have been incorporated for a minimum period. Newly formed companies can still be eligible for buy-to-let mortgages.

Managing Your Limited Company Buy To Let Portfolio

Running a property portfolio through a limited company requires careful management and attention to legal requirements. Here are some key aspects to consider:

Financial Management

Keep detailed financial records.
File annual accounts and tax returns with Companies House and HMRC.
Monitor cash flow carefully.
Consider using accounting software designed for landlords.

Legal Compliance

Ensure compliance with landlord regulations.
Maintain proper insurance coverage.
Stay up-to-date with changes in tax laws and property legislation.

Growth Strategy

Reinvest profits for portfolio expansion.
Consider diversifying into different property types or locations.
Regularly review and optimize your mortgage arrangements.

FAQs about Limited Company Buy To Let

Can I transfer my existing properties into a limited company?

Yes, transferring existing properties into a limited company is possible. This process is essentially selling the property to your company. This can trigger capital gains tax and stamp duty, so seeking professional advice before proceeding is crucial. You will also be required to pay legal fees for a solicitor acting on behalf of yourself and also the limited company.

How does Limited Company Buy To Let affect my personal tax situation?

While the company pays corporation tax on profits, you’ll only pay personal income tax when extracting money from the company, typically through dividends or salary. This can offer more flexibility in managing your personal tax liability.

What is an SPV Limited Company?

An SPV, or Special Purpose Vehicle, is essentially a regular limited company created for a specific purpose. In the context of property investment, an SPV is used exclusively for buying, selling, renting, and managing properties.

Setting up an SPV limited company for buy-to-let offers certain advantages. It provides buy-to-let mortgage lenders with the confidence that the company is legally authorized to buy, sell, rent, and manage property. Additionally, it ensures that any funding provided by lenders will be dedicated solely to property purchases. This structure can make it easier to secure financing and manage your property investments efficiently.

Conclusion

Limited Company Buy To Let offers a compelling option for property investors, particularly those in higher tax brackets or with ambitious growth plans. The potential tax efficiencies and flexibility in portfolio management make it an attractive strategy. However, it’s important to carefully weigh the pros and cons.

It’s not a one-size-fits-all solution. The decision to opt for a Limited Company Buy To Let structure should be made after careful consideration of your circumstances, long-term goals, and consultation with financial and legal professionals. As the property market and tax landscape continue to evolve, staying informed and adaptable will be key to success in the buy-to-let sector.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Most Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Bolt Mortgages is a trading name of Just Mortgages Direct Ltd which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 12/09/24.