How to Get a Limited Company Buy to Let Mortgage

10-November-2021
10-November-2021 15:35
in Mortgage
by Sam Hodgson
How to Get a Limited Company Buy to Let Mortgage

The surge of buy to let mortgage applications across the UK is not slowing down.

Is getting your buy to let mortgage through a limited company the most tax-efficient way to finance your purchase?

We’ll be taking a look at whether buying your rental property through a limited company is worth it, and how you can go about sourcing a specialist mortgage for this type of purchase.

In This Guide:

What is a limited company buy to let mortgage?
  - How do limited company buy to let mortgages differ from standard mortgages?
  - What are the requirements for a limited company buy to let mortgage?

Should I purchase my buy to let property through a limited company?
  - Limited company buy to let mortgages and income tax
  - How to withdraw money from your limited company:
  - Limited company buy to let mortgages and dividend tax
  - Tax Relief on Mortgage Interest
  - Inheritance Tax Planning and limited company properties
  - Capital Gains Tax on limited company buy to lets

How do I set up a limited company or SPV?
  - How to manage your limited company or SPV:
  - Where can I get a limited company mortgage?
  - How can a specialist Mortgage Broker help with a limited company buy to let mortgage?

What is a limited company buy to let mortgage?

A limited company buy to let mortgage, or a LTD company or Special Purpose Vehicle (SPV) mortgage, is a buy to let mortgage taken out in the name of a company. You can use them to purchase a property to hold in your company’s name.

The main benefits of getting a buy to let property in this way are tax related: you pay corporation tax rather than personal income tax on any rental earnings and profits, but there are other pros and cons of this approach too.

Buy to Let Property

How do limited company buy to let mortgages differ from standard mortgages?

If you're buying a property to live in yourself, then this approach is not for you.

But if you're buying a property to let out and create a rental income stream, then you could potentially save money by purchasing your rental property, and your mortgage, through a company set up solely for this purpose.

The mortgage you get is very similar to a standard buy to let mortgage, but as your company will technically own the property and the mortgage, your mortgage repayments and your rental earnings are treated differently for tax purposes.

Are there any drawbacks? 

You might need to pay slightly higher mortgage interest rates for this kind of specialist mortgage, and you may need a larger deposit compared to a standard buy to let mortgage if you're buying through your company.

modern flat interior

What are the requirements for a limited company buy to let mortgage?

Here are our key points of consideration for limited company buy to let mortgage applications:

  • There can be a minimum property value of at least £50k required
  • HMOs are usually accepted for limited company buy to lets
  • Your property rent will need to cover around 125% of the mortgage interest
  • You might face minimum income thresholds from some lenders
  • Portfolio landlords are usually accepted for limited company buy to lets
  • Minimum and maximum age terms can apply
  • Maximum loan to value will like be 70-75% for a limited company BTL
  • Higher interest rates compared to a standard buy to let mortgage
  • Variable and fixed rate products are available

Should I buy my buy to let property through a limited company?

The main advantage of owning your property through a limited company is the various tax differences compared to a standard, privately owned buy to let.

Here’s a list of the main taxes that can differ:

The Taxes:

  • Income Tax
  • Expenses (including mortgage interest)
  • CGT
  • Future Inheritance Tax Planning (IHT)

Limited liability: If your company goes into administration, you don't usually have to sell your other personal assets (unless guarantees or other securities are given) - you have less personal liability if things go wrong. 

limited company buy to let

Income Tax

Whether or not you can save on your income tax depends on your other sources of income and which tax bracket your earnings fall into.

You’ll might only save money if you’re at least a higher-rate taxpayer, but remember to always check with a qualified tax specialist before making any tax-based financial decisions.

The calculations are complicated and depend on a number of factors, but we’ve summarised the basics to give you an idea of what the most tax efficient mortgage option is for you.

If you own your property through a limited company then you pay corporation tax on any rental income as opposed to income tax. With corporation tax being a fixed 19% (for the current tax year at least), this could be lower than your income tax rate, especially if you are a high earner.

But, you still need to withdraw this money from your company for personal use. This incurs additional tax charges which we talk about later.

Example Scenario with a standard buy to let mortgage:

  • Your personal salary is £50k per year
  • The rental income from your buy to let property is £8k per year
  • You’ll be paying a whopping 40% of income tax on the majority of your rental revenue each year

But on the other hand, if the rental income from your buy to let property is your only source of income, you're probably better off taking out a standard buy to let mortgage as the majority of your income will fall within your tax-free allowance of £12,570 (for the current tax year).

buy to let flat

How to withdraw money from your limited company:

Whether this helps you save money on your final tax bill or not depends on how you then withdraw this money from your company. This can be done via:

  • Salary
  • Expenses
  • Benefits
  • Dividends
  • Directors’ loans

Dividend payments are often more tax efficient than salary due to the preferable tax rates, particularly if you are a higher or additional rate income taxpayer. HMRC's information page provides some more detailed information on each option. 

Dividend Tax

For the current tax year, you have a tax-free dividend allowance of £2,000, and the remaining amount is taxed based on your relevant personal income tax band, as follows:

  • Basic rate: 7.5%
  • Higher rate: 32.5%
  • Additional rate: 38.1%

*** Remember, your tax band is calculated based on the value of your earned income (including salary and rent) and dividend income added together.

Once you’ve paid your 19% corporation tax and dividend tax on your earnings, you may be better off than if you’d paid a flat 40% or 45% personal tax as a private landlord; however, we suggest speaking to a qualified tax specialist to confirm your figures.

You also need to factor in the potential higher rates of mortgage interest you’ll be paying, along with any accountant’s fees and administration fees you may need to cover.

Tax Relief on Mortgage Interest

Since 2017, HMRC has gradually been reducing the amount of the interest you pay on a standard buy to let mortgage that you can claim as a tax expense.

In previous years, it was lucrative for higher-rate taxpayers to offset their interest as a tax expense, as they’d avoid paying up to 45% tax on the value of their annual interest.

However, as of April 2020, the government has fully removed the ability to do this and now just allow for a blanket 20% tax credit in its place.

With a limited company buy to let mortgage, you can still claim this as an expense against your corporation tax at 19% so you won’t be losing out here by owning your property via your company. You won’t really be gaining an advantage, either, but you won't be losing out like you used to.

Stamp Duty

You still pay stamp duty on residential property purchases through a limited company.

BTL Flat Via Limited Company

Inheritance Tax Planning

Transferring a private property into a new owner’s name can be a time-consuming process and incur costly legal fees.

Transferring a limited company to someone else, however, can be cheaper and quicker. If you intend to gift your property to a family member in the future then this approach is worth considering.

As with standard IHT rules, if you die within 7 years of gifting your company or property it will be subject to Inheritance Tax.

Capital Gains Tax

  • If you’re a higher rate tax payer you’ll pay 28% CGT on gains from a sale of residential property, including rental properties.

  • You also have an annual CGT allowance that you don’t have to pay tax on, which for the current tax year is £12,300.

  • If you own your property through a limited company, then your gain from selling is classed as a profit for your business and is charged with corporation tax, currently at 19%, instead of CGT.

While you don't get a tax-free allowance like you do with CGT, you could end up paying less tax on your sale by owning it through a company - particularly if you are a higher-rate tax payer and have already used your CGT allowance that year on other investments.

*** Remember that rates change annually, and it is important to seek professional advice before taking action. If you're unsure, it's worth looking at HMRC's own wording

modern buy to let flat

How do I set up a limited company or SPV?

The easiest way to incorporate a limited company is online via the Companies House website, here. You can do this in under 30 minutes for as little as £12, but you need to be aware of the ongoing responsibilities of owning a company.

How to manage your limited company or SPV:

Some of the primary responsibilities to keep in mind are as follows:

  • Keep company records and report any changes

  • File the Company Tax Return and accounts

  • Ensure your Corporation Tax is paid

Where can I get a limited company mortgage?

Most mortgage lenders will not offer loans to limited companies, and you may need to rigorously scour the market to find the best options out there for you.

A specialist Mortgage Broker like Clifton Private Finance provides qualified mortgage advice, and we can establish which lender is the best for your circumstances.

Have a look at our Commercial Finance Mortgage Solutions

holiday let limited company

How can a specialist Mortgage Broker help?

At Clifton Private Finance, we have an established relationship with multiple specialist mortgage lenders that offer bespoke mortgage solutions to our clients. Using our knowledge and expertise, we can help you get the best limited company buy to let mortgage available to you on the market.

We can also advise what kind of mortgage is right for you, and talk you through the steps of getting everything in place for your property purchase.

Ltd Company Buy To Let Mortgage Case Study

Peace of Mind...

All of our advisers are fully qualified, and our advice is authorised and regulated by the Financial Conduct Authority so you know you’re getting help you can trust.

Speak to our specialists today on 0117 959 5094, or complete our contact form here and we will be happy to get in touch.

0117 959 5094 

 

Share on Facebook   Share on Twitter Share on LinkedIn   Share on Google+   Share via Email