BUY TO LET LIMITED COMPANY MORTGAGE | BUY TO LET ADVICE ON PROPERTY INVESTMENT. of Valdamark Ltd
Description of the Service
This increase and tax changes have a significant impact on commercial property finance as well as being a game changer for the traditional landlord mortgage.
However, despite these setbacks, changing to a buy to let mortgage has become a viable option. The setting up of a buy-to-let limited company can in effect avoid the stamp duty increase and its accompanying new tax laws.h
The question becomes is buy to let worth it? What are the major considerations if you decide to take this route?
The growth of the buy-to-let limited company
It seems recently everyone is talking about the buy-to-let limited company. There have been big changes announced by the UK chancellor.
A Buy-to-let limited company is where an individual buys an investment property via a limited company instead of buying it as an individual. With the big changes in the chancellor’s recent budgets, new rules for both mortgage interest tax relief and stamp duty has affected everyone who owns multiple buy-to-let properties. These rules are drastically changing the game for many individuals.
How the rules have changed
Everything has changed for private landlords who trade individually and would look to a traditional landlord mortgage as there most viable finance option. They are required to pay more for stamp duties when purchasing new properties in some cases even four times more than the previous system. For many, this means it is prohibitively more expensive to add a buy-to-let property to their investment portfolio.
Tax relief rules have also changed the income tax brackets of landlords so they will not be able to claim a portion of their mortgage interest back. For 40% and 45% band taxpayers, they will be required to pay more overall.
The changes in stamp duty and relief rules mean it is cheaper to run a buy-to-let portfolio using a limited company rather than individually. In extreme cases, landlords may no longer be able to run a buy-to-let business on their own.
The details of stamp duty changes
The stamp duty changes were the first rules to come into effect. The stamp duty is a percentage of the total value of the property paid when you buy it. Basically a land tax. It is reckoned in a similar way income tax is calculated using bands of value, meaning the percentage of stamp duty goes up once the value of the property increases. If the property is worth less than $125,000, then the stamp duty does not apply. It does come into effect though once the value of the house is more than the amount. The stamp duty goes up from 2, 5, and 10 and finally, 12% for the most expensive properties.
So to put this in perspective on typical property worth £275,000 –
0% would apply for the initial £125,000 = £0
2% would apply for the next £125,000 = £2,500
5% would apply for the remaining £25,000 = £1,250
As you can see the costs can add up quite significantly and can easily hit 2% of the value for more expensive properties.
Numbers aside here’s how it will affect the landlords.
How does the stamp duty affect buy-to-let landlords?
Previously, the stamp duty was equal for everyone, whether you are a first buyer or full-time landlord. However, the new rules make stamp duties for full-timers landlord’s 3% more. So if you want to purchase a second home or a buy-to-let property rather than paying the same amount as a first-time buyer pays, the stamp duty will increase.
Instead of the 0%, 2%, 5% and 10% given in the above example, stamp duty now increases 3%, 5%, 8%, 13% and 15% respectively.
The 3% may sound a little for most people, but it makes a huge difference for landlords. It does not need to be a buy to let property it could just be a second home.
Take a landlord with multiple properties. Based on the typical £275,000 value example, he could easily see stamp duties of 5% on individual properties. So instead paying around £4,000 in stamp duty, around £12,000 could be incurred under the new regime.
Tax relief details
The tax relief has changed too. As quoted above, the new rules don’t allow landlords to climax all their mortgage interest rates, they only allow 20% of the mortgage interest. The charges took effect early this year, 2017 and will be phased in over a 4 year period.
Commercial Property Mortgage Versus Buy-To-Let
The changes mean that landlords and other people maybe with second homes will prefer to put their buy-to-let property portfolio under the banner of a limited company. It’s just cheaper overall.
Still, individuals can get mortgages to purchase buy-to-let properties, but for a different consideration than using a limited company. To do so is preferable to a standard mortgage. Through a buy-to-let limited company, many lenders offer better options to buy property. The move is becoming popular and certain lenders even offer you the option to purchase through a limited company to begin with.
Landlords who are higher rate taxpayers used to claim back tax relief on their mortgage interest payments. In other words, they could claim back 45% of their interest payment if they paid 45% income tax on their earnings. Landlords can only claim 20% the basic tax rate on their mortgage interest rate. However, things are different when using a buying-to-let limited company. The mortgage interest rate is viewed as the business expense, meaning it reduces the total amount of taxable profit.
For businesses and landlords, it is better when working with limited companies than working individually. On top of that, the corporation tax for profits is 20%, meaning it lower than income tax rates.
Both the tax relief and stamp duty changes combined are making it difficult for landlords to work individually. This is where the buy-to-let limited company comes into place. Although, in some situations buy-to-let landlords might prefer to use a special purpose vehicle for their rental business. Using a buy-to-let limited company is a good idea for landlords because a corporate structure would change that tax implication on the rental properties. The tax implication of mortgage interest is considered as expenses when the assets are owned by a limited company. This means it would reduce the total amount of taxable profits. This is likely a favorable change for high-rate taxpayers because individuals pay tax on income, whereas a company pays tax on the profit. In these cases, companies will pay less tax than individuals.
Finally, the tax bill is reduced for companies that reinvest profits. This means that you could use rental income to expand your portfolio. There are no extra cost incurred. However, you have to account for the setup cost if you are considering transferring your buy-to-let properties to a limited company.
How to finance a buy-to-let limited company
When looking to set up a buy-to-let limited company, there are lots of things you need to take into consideration before making a decision. In many cases, it’s a favorable move to manage your buy-to-let properties.
This said since everyone’s situation is different and there are many different areas of commercial and private tax laws. As well as the circumstance these rules and regulations should always be a part of the discussion whenever you think of starting a limited company.
Price of the Service
Short Form Consultants are able to help you navigate the requirements of your existing lender and with a very close working relationship with a National Association of Commercial Financial Brokers (NACFB) to support clients to package and present to alternative funding providers.
Nigel Whitfield is a highly experienced commercial banker with over 30 years combined experience. With much of this gained during the period following the financial crisis he has an in depth knowledge and understanding of the current climate and the demands this puts on business.
During the next decade the lending landscape of the United Kingdom will change dramatically in line with global trends. Commercial banks will not be the only source for capital as many alternative, non banking lenders are now emerging as significant investors for business.
Inspired by countless conversations with many business owners and entrepreneurs, Nigel launched Short Form Consultants in 2016 to be part of the solution to a problem that is plaguing millions of business owners looking to grow. Access to working capital.
Short Form Consultants specialize in advice and guidance for a variety of commercial finance options including. Commercial mortgages, Asset Finance, Invoice Finance and Invoice Factoring.
We have helped a broad clientele secure their funding requirements. They can be those looking for a commercial property mortgage or a property development loan through to clients looking for a working capital solution with invoice finance or invoice factoring.
It’s no secret that businesses need money to make money, but 4 out of 5 applications by business owners will be denied for a business loan. Or the terms they achieve will be less than favorable. Short Form provide a bespoke approach to commercial finance allowing you to focus on the actual running of your business while we review your options and assist you in a complete and ‘lender friendly’ proposal.
Our goal is honesty and integrity. We want to make lenders compete for your business, not the other way around.