How limited company lending is coming to the rescue of Buy to Let

Over the last few years, landlords have been hit with a series of tax and regulatory changes. An additional 3% Stamp Duty surcharge and the abolition of mortgage tax relief have made Buy to Let more expensive, while more stringent affordability tests have made it tougher for borrowers to secure the finance they need.

What this has meant is that limited company lending is becoming more and more common. Indeed, a recent survey revealed that this is now the most popular way of structuring Buy to Let lending.

Keep reading to find out more about limited company Buy to Let, why is it so popular, and how it’s helping the market to flourish.

How does limited company Buy to Let work?

Instead of buying a rental property in your individual name, you can set up a limited company and buy your investment through this company. Setting up a limited company takes just a few minutes online.

Purchasing a Buy to Let through a limited company means:

  • Rental profits are subject to Corporation Tax, not Income Tax
  • You can deduct finance costs (such as mortgage interest) from your income as they are considered business expenses
  • It’s easier to transfer a limited company to another person than it is to transfer a privately held property. This can also protect the transaction from Stamp Duty, Capital Gains Tax and Inheritance Tax.

Bear in mind that if you are considering this route, there could well be additional costs involved in running a limited company. These may include the preparation of company accounts, legal fees and Corporation Tax.

We always recommend that you seek advice from an accountant or a legal professional before making any decisions regarding how you invest in property.

Limited company now the preferred route for all landlords

Purchasing a Buy to Let property through a limited company is now the preferred route for all landlords, irrespective of their portfolio size or the type of property.

That’s the conclusion of new research by Foundation Home Loans which shows that 62% of landlords with between one and ten properties would purchase via a limited company, almost equal to the 65% of those with 11 or more properties who said the same thing.

Previously, landlords with larger property portfolios were more likely to purchase through a limited company while those with smaller properties typically took out a traditional Buy to Let mortgage in their individual name.

Overall, almost two thirds (64%) of the landlords questioned planned to make their next purchase within a limited company vehicle — up from 55% of those asked earlier in the year.

Due to the changes in the tax treatment of Buy to Let profits, limited company lending is now more attractive to landlords as they can offset mortgage interest against profits which are subject to Corporation Tax instead of Income Tax rates, which works out cheaper.

Additionally, from April 2020, tax relief for finance costs will be restricted to the basic rate of Income Tax, currently 20%. And, relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.

Another reason to consider limited company Buy to Let is that interest coverage ratios on limited company applications are also typically lower than for most individual landlord applications.

Mortgage expert Nick Morrey said the research was ‘very much’ in line with what he saw in the mortgage market at the moment.

He said: “I think it will be the standard way the majority of landlords buy a property in the near future. The knowledge that limited companies are the most tax efficient way is filtering down and will soon become common knowledge.”

Jeff Knight, director of marketing at Foundation Home Loans, said: “The rise in limited company usage by landlords shows no sign of tailing off, particularly as we have a more professional landlord community who recognise the benefits of using such a vehicle.

“It’s therefore perhaps no surprise to see a growing number of landlords signalling their intention to make their next purchase through a limited company.”

Limited company lending helping to support strong Buy to Let lending

The latest lending figures show that the number of new landlords buying property or former landlords expanding their portfolio is on the up again.

According to Morrey, the latest rise could be down to the fact landlords are ‘getting to grips’ with the fact that buying properties through limited companies was ‘the way forward’.

He added: “The landlords that were going to leave the market have left, and those that are left have moved into the limited company space and have realised they can borrow what they need in a tax efficient way.”

In August 2019, 5,900 borrowers purchased a rental property with a Buy to Let mortgage, 23% more than the 4,800 who did the same in February.

The figures also showed the value of new Buy to Let mortgage lending increased from about £6bn in February to £8bn in August.

Get in touch

Do you want to invest in property? We have access to a wide range of limited company Buy to Let products and can help you find the right deal for you. Email or call (0207) 808 4120 to find out more.