Limited Company vs Personal Name
Buy to Let Mortgages

Limited Company Buy to Let Mortgage

Landlords feeling the tax pinch have been exploring the benefits of holding their portfolios through a limited company rather than in their personal name.

41,700 limited companies were set up in 2020 for Buy to Let properties

Since the tax changes were introduced in 2017 there has been a rise in the number of landlords looking to restructure their property portfolio. A study by Hamptons International found that there has been a 128% increase in buy to let incorporations since the first stage of the tax changes came into force.

For those who are higher rate and additional rate tax payers this has become an increasingly important consideration. The new tax legislation has been phased in gradually and as of the 2020-21 tax year landlords can now only offset 20% of their mortgage interest payments against their tax liability. For those who are new to the market this figure previously in 2016 was 100% of the interest charged by the mortgage lender.

Some landlords have decided to reduce the number of properties that they own in order to reduce the affect on their net income, others have sold entire portfolios as they now feel the market does not generate the returns they initially signed up for. Some of our clients have taken tax advice from their accountants and have opted to transfer the ownership of the properties from their own personal name, into an SPV (Special Purpose Vehicle) which means the company now owns the property and not the individual. Landlords who hold their portfolios via an SPV are able to offset 100% of their monthly mortgage interest against the profits of the company, effectively meaning they are in the same position as they were in 2016. However the SPV now owns the property and as a result the future implications of the property follow different criteria. For anyone thinking of building a portfolio or for those thinking about transferring their portfolio into an SPV it is crucial that they speak with their accountant to ensure they fully understand the pros and cons of this type of structure.

SPV Limited Company Basic Rate Tax Paying Individual Higher Rate Tax Paying Individual
Purchase Price £250,000 £250,000 £250,000
Annual Rent £12,000 £12,000 £12,000
Annual Mortgage Interest (3.5%) £6,563 £6,563 £6,563
Gross Profit £5,437 £5,437 £5,437
Tax Due £1,033 £1,087 £3,487
Net Profit £4,404 £4,350 £1,950

Based on the example above, the tax benefits of owning rental properties via an SPV are clear when we look at the Net Profit figures. However there are other factors to consider when we are looking at Buy to Let mortgages for properties held within the SPV. Typically the interest rate charged by the lender is higher than the rates available to individuals. Also, the Arrangement Fees typically charged on SPV Buy to Let mortgages are higher as well. Whilst these can be offset against the businesses profit, it is something to be mindful of when deciding how you want to structure your portfolio.

With rental figures across the region finishing the year on a high and the mortgage market still remaining challenging for those looking to get on the property ladder could we see further increases in rents in 2021? If so how does that affect your tax position?

Straight to the point…

  • Due to the tax implications for landlords there has been an increase in SPV companies established

  • Those affected the most by the tax changes are higher rate tax payers and landlords with large portfolios

  • Mortgage lenders tend to charge higher fees and interest rates when lending to a company

  • For more information about the benefits of owning property via an SPV you should speak to your accountant

  • Equity Select can help arrange Buy to Let mortgages whether it’s for an individual landlord or an SPV

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