There has been important legislative changes over the past few years that have impacted the profits that landlords can earn from their properties. Despite this, landlords are still remaining positive about new investment opportunities. 15% of landlords plan to purchase property in the next year, up from the historically low 12% reported last year. For many, setting up a limited company could provide the much needed solution to these recent legislative changes.
Top rate paying individual landlords have recently seen the amount of buy to let tax relief on mortgage interest payments reduced heavily from a maximum of 45% to just basic rate tax relief of 20%. Higher costs have forced some landlords to reduce their portfolio and halted plans to expand in the near future. The reduction in tax relief does not however encompass limited companies, who can continue to fully offset all their mortgage interest payments against the rent before calculating taxable profits. Limited Company profits are currently subject to corporation tax, a significantly lower amount than income tax. A landlord will also be able to avoid income tax on their retained profit if they are looking to re-invest and grow their portfolio of properties at a faster rate. This option is becoming increasingly popular, with 38% of landlords planning to purchase a property in a limited company in the future.
Lenders more favourable rental calculations making it more affordable
Another benefit of using a limited company to apply for a BTL mortgage is the more favourable rental calculations used by lenders. As a limited company will not be affected by the tax changes, a lender does not have to take this extra cost into account as they do for mortgages held in a personal name. This means the lender can offer a more favourable rental affordability calculation meaning a landlord can often borrow significantly more via a company structure.
EXAMPLE: £200000 purchase price, £800 month rent 2 year fixed rate of 2.99% Typical loan for a loan for an Individual Application: £120376 Typical loan for a Limited Company Application: £153600
It is important to seek specialist tax advice before proceeding with any new purchase as there can be many variables, which mean a strategy that is right for one landlord may not be right for another. It is also costly to move a property between individual name and company name or vice versa, so it is best to get it right first time.
One of Connect Mortgages’ lenders has recently launched a new range of BTL products for limited companies, with highlights including.
Up to 80% loan to value
Low 2 and 5 year fixed rates
Available for purchase and remortgage
And much more.
If you need advice on getting finance for a BTL property, expanding your current portfolio or finding the best rates available for you, contact us, we will be happy to help.