Purchasing a buy-to-let mortgage as a limited company has become one of the biggest property trends over the past few years – but will it work for you?
A buy-to-let mortgage for limited companies allows you obtain a mortgage on properties through a business, as opposed to in your own name. It is advised that these mortgages are used to buy and remortgage residential properties that are leased or let already, or will be ready to let within a month.
This has been a popular way to invest in property since 2017, when the tax relief landlords could claim on their mortgage interest (as much as 45%) started to be gradually reduced.
It’s not the right solution for everyone so here are the advantages and disadvantages to investing in property as a limited company and you can decide whether it’s the best move for you.
Look at changes to tax relief
The changes to how tax relief is calculated have created a real advantage to investors. Whilst the amount of buy-to-let tax relief for individual landlords was gradually cut from a maximum of 45% to 20% in April 2020, this change does not affect limited companies.
The tax-free dividend allowance in 2022 is £2000, so clients can potentially receive some tax-free dividend from the limited company. However, for basic rate taxpayers close to the higher rate threshold it may have the effect of pushing them in to the higher rate bracket, thereby meaning they may also pay additional income tax.
A 4% Additional Dwelling Supplement (ADS) is now levied on second properties with a purchase price over £40,000, which could also lead to more income tax for those in higher tax brackets to pay.
Don’t forget the extra time and costs
The main downside? There’s no capital gains tax allowance when the company sells a property. Individuals would have a capital gains tax allowance, doubled where the property is owned jointly.
Additionally, setting up and running a limited company can be more time consuming than investing in property as a private individual. First, you will have to set up your business on Companies House which costs £12 or £100 for same-day service. After registering your company, you will have to send detailed accounts, company tax and corporation tax calculations to HMRC. If you decide to hire an accountant to help, there may be extra costs involved such as legal and auditing fees.
You could pay higher mortgage fees
Many lenders currently do not offer mortgages for limited companies so there will be a restricted choice and possible higher interest rates.
The best way to find a buy-to-let deal that works for you is to find a mortgage adviser who specialises in that market. They will have the skills, knowledge and contacts to make sure that you secure the best rates.
The information contained in this article is provided in good faith and is valid for six months. Whilst every care has been taken in the preparation of the information, no responsibility is accepted for any errors which, despite our precautions, it may contain. No Individual mortgage advice is given, nor intended to be given in this article.