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Limited Company Buy to Let – what you need to know

Changes to regulations and taxation laws in recent years have inspired an increase in landlords using limited company Buy to Let lending. This type of lending has some advantages but many investors new to this type of venture may not understand how it works, what the tax implications are, and whether it is the right strategy for them. If you are interested in limited company Buy to Let and you want to learn more about it then continue reading.

How Does Buy to Let Work For Limited Companies?

Most first time property investors will take out a mortgage in their own name to buy their property. But many landlords are deciding instead to buy their properties through a limited company instead of buying in their own name.

The landlord first sets up a limited company for the sole purpose of buying investment properties. They then put some of their own funds into the company to be used as a deposit, so they can discuss with mortgage lenders and arrange for the limited company to borrow money. 

The company owns the property, so the taxes paid on the profits are paid under corporation tax rates, which are currently at 19%. The landlord does not have to pay the taxes that they normally would on a private mortgage. 

If you decide to sell your investment property in the future, all of the money goes into the limited company, instead of coming directly to you. The corporation taxes will be applied and then you will be able to take the money out of the company. 

What Are The Benefits of Limited Company Buy to Let? 

One of the main benefits for landlords is the reduced tax that they pay on the property. In 2016, the stamp duty that landlords paid on investment properties was increased by 3%. In 2017, the way that tax reductions are calculated on investment properties changed as well. Tax reductions are now calculated based on income tax rates, which means that the majority of landlords will pay more, especially if they have multiple properties and they are in a high tax bracket. However, the big benefit of limited company Buy to Let is that the property is not subject to these tax changes and the tax will be calculated based on corporation tax rates instead. 

Aside from the tax benefits, there are a lot of other reasons that landlords should consider limited company buy to let. Transferring a limited company to another person is easier than transferring a property that you own privately, so if you want to pass it on to a family member, you don’t need to worry about inheritance tax and stamp duty. 

Capital gains tax is also lower because the business is making a profit rather than you personally, so you will save some more money there as well. You are not liable for the debts of a limited company either, so if your investment goes bad and you build up a lot of debts, your personal assets are protected.

How Do You Know If Limited Company Buy to Let Is Right For You?

Before deciding whether limited company Buy to Let is right for you, it is important to consider some of the downsides. 

When a limited company sells a property, there is no capital gains tax allowance. An individual has an allowance of £12300 but a limited company will have to pay capital gains tax on the full amount. If you plan to sell the property in the future, you need to consider this. 

There are also fewer mortgage options available for limited company Buy to Let. However, there are companies that specialise in these kinds of mortgages and can help you to find a good deal. 

If you have considered these downsides and decided that limited company Buy to Let is the right choice for you, it is time to start looking at lending options. 

What Are The Expenses and Fees Involved With Limited Company Buy to Let?

When taking out a mortgage as a limited company, there are certain expenses and fees involved. There are fixed interest rates available as well as variable rates, which will be based on Bank of England interest rates. If interest rates drop and you want to cancel the fixed interest rate, you may have to pay a breakage fee. 

Early repayment fees are in place for many mortgages, so if you want to clear the balance early, this can be costly and you may not save any money on the interest. Lending fees and associated borrowing costs will be applied to the monthly mortgage payments, so it is important to consider these when calculating the monthly cost of owning and maintaining the property. 

There are also fees to pay when running a limited liability company. You must pay a fee to register as a limited company with Companies House and you will have to pay for the preparation of accounts, which is a legal requirement.

Who Can Apply? 

Although all lenders have their own criteria to decide who can apply for a limited company Buy to Let mortgage, there are some basic requirements that you will need to meet. You need to have a good credit rating and you must own your own home. You will also need to earn over £25,000 a year, in most cases. 

Some lenders will impose age limits on the mortgages as well. Many lenders require you to be over the age of 21 if you are already a landlord and over the age of 25 if this is going to be your first property. 

What Are The Maximum And Minimum Borrowing Amounts? 

Certain lenders will only lend money on properties over a certain value. In many cases, this is a token amount of around £40,000. However, some lenders will have minimum borrowing amounts of £100,000 or more. The maximum amount that a lender will offer you depends on your personal financial position, but some will impose a limit on the number of properties that you can buy on a single mortgage. Many lenders do not allow multiple applications either. 

Hopefully, you now have a clearer idea about how limited company Buy to Let works and whether it is the right option for you.