Personal vs Ltd Company Buy to let
The year 2017 came with some major changes to the buy to let mortgage market and the wider sector as mortgage interest relief started to be phased out for any buy to let property that was owned in your personal name.
Essentially before this buy to let landlords could take away the mortgage interest they were paying on their mortgage from the rental income, this was phased in over 4 tax years. As most buy to let mortgages typically are interest-only this meant in practice most landlords could offset their whole monthly mortgage payment.
Let’s look at an example:
Rental income £10,000 per annum
Interest on mortgage £6,000 per annum
Rental income £10,000 – Interest on mortgage £6,000= £4,000 net per annum
Tax due on £4,000
Example Post 2021
Rental income £10,000 per annum
Interest on mortgage £6,000 per annum/no mortgage interest relief applicable
Tax due on £10,000
The above is an example, of course, there would very likely be other related expenses incurred which could be used to offset the tax bill and indeed this remains the case today, it’s just the mortgage interest relief that has changed, but as this is the main outgoing for any buy to let property the tax changes have made a significant difference.
The key other difference is essentially the rental income from the buy to let property(s) now forms part of your personal taxable income and whereas the main difference is felt by higher and additional rate taxpayers who will be paying now 40%-45% on the rental income received; previously basic rate taxpayers could be pushed into the higher rate band of taxation and subsequent start paying 40%.
The basic rate taxpayers are able to claim a 20% tax credit on their mortgage interest but the way rental income is now calculated for tax purposes means you could still get pushed into the higher rate band.
Buying a property is still a great investment for the long term, but careful planning is needed and you should speak with a mortgage broker who is experienced in this field and be sure to engage with an accountant to understand your individual implications. You could benefit from a ltd Company/SPV buy to let ownership and mortgage.
Ltd company ownership
Now if you were considering ownership for future purchases or even transferring your current property (s) into a ltd company structure this could help mitigate some of that tax by separating the property income from your personal income to income from the ltd company.
So if set up correctly, the ltd company will own the property, not you (albeit you own the ltd company as a shareholder), and therefore after offsetting your costs and mortgage interest you only pay corporation tax on the net income after those deductions.
Only when you remove that income from the ltd company does it form part of your personal income and do you then pay personal taxation on the withdrawn income. This could be in the form of salary or most likely dividends due to the tax advantages of them.
This means you’re in control of when you take the income from a personal taxation point of view and if you don’t require the income now as an example you could defer taking it from the business until the time your total income was well within the basic rate band as an example, therefore avoiding the higher rates of tax at that time.
SPV or Special Purpose Vehicle is the technical term for the Ltd company
This is the legal/ technical term for what is in effect the ltd company that owns the property. But mortgage lenders only want the “ ltd company” to hold property and not to be a trading company i.e. for a shop or normal business etc.
Small technical point to be aware of as there is a difference and although lenders, accountants, solicitors, and even yourself at times will refer to the property being owned in a ltd company structure it would technically be in a Special Purpose Vehicle or SPV for short.
You should also allow for the fact that purchasing a property in a ltd company/SPV set up would mean attracting the current 3% additional stamp duty tax on the purchase of the property.
If you owned a property in your current personal name and were concerned with the higher or additional rate tax you were already incurring, or that you’re a basic rate taxpayer currently and likely to be pushed into the higher rate tax band you could transfer your current personally owned buy to let property into a ltd company/SPV arrangement.
This would, however, be considered a purchase event as you’re essentially selling the property to the ltd company/ SPV and therefore the 3% additional stamp duty tax would be typically due.
However, you may consider the additional income tax you will be paying on the rental income vs that one-off payment of stamp duty as worth the exercise and some lenders will let you borrow the extra amount onto the new mortgage to cover that stamp duty bill. So a nice way of avoiding having to have the funds upfront to complete that transaction, though think carefully about doing this as you’re in effect paying interest on the funds you used to pay the stamp duty bill as it’s part of the mortgage now.
Overall it can sound very complex and confusing and whereas it’s certainly not straightforward, your mortgage broker will be experienced with these types of things and will be able to help you arrange it all for you. Ltd/SPV mortgages rates tend to be higher than a traditional buy to let mortgage, but they’re becoming more and more competitive by the day as a greater number of people are now considering this option so becoming more and more mainstream and that will be good for customers looking for good terms.
Read on to find out options to renovate properties and what it means to own more than 3 buy to lets in “Refurb buy to let & Portfolio Landlords“