It’s common knowledge in the industry that limited company structures are popular amongst landlords looking to mitigate against the tax changes. Indeed, according to our research conducted alongside the BVA BDRC, in Q2 of this year over half of landlords (55 per cent) intended to carry out their purchases via a limited company. This increased to 71 per cent of landlords that have over 11 buy-to-let properties within their portfolio.
But, while the tax benefits of becoming a limited company are well known, there are other benefits to incorporating – particularly as we move closer to a post-Brexit world.
This is because a limited company landlord can receive company dividends tax free, and as limited company profits are not exposed to income tax while retained within the business, this extra capital can be used to build portfolios or refurbish existing properties.
The housing market is arguably feeling the effects of the current uncertainty surrounding Brexit. House price growth has stalled somewhat and could possibly fall in some regions, should we experience a no-deal. However, this could mean an opportunity for those landlords with capital to spend. There is pent-up demand hovering in the market due to landlords delay purchasing decisions, biding their time for the right opportunities to increase their portfolio sizes. Limited company landlords who are able to keep extra capital within the company are therefore likely to be in a good position to expand their portfolio by ‘buying on the dip’, making the most of the subdued property prices.
Why else would a landlord incorporate?
In recent years, landlords have been hit by a slew of tax changes which has prompted a rise in the number of landlords purchasing through a limited company structure. Whilst private landlords purchasing as an individual will be taxed on their income, those acting through a limited company will be taxed on profits. This has obvious benefits, as changes to mortgage interest tax allowance are currently being phased in. Indeed, come April 2020 landlords will no longer be able to deduct any of their mortgage expenses from their rental income in order to reduce their tax bill.
In addition, limited companies will pay corporation tax at 19 per cent (moving to 17 per cent in 2020) rather than income tax – 20 per cent for basic-rate taxpayers and 40 per cent for higher-rate tax payers.
By incorporating, landlords also have access to larger value loans. The PRA’s changes to underwriting criteria for landlords means that lenders now typically require for rent to cover up to 145 per cent of interest payment for private landlords. However, these changes don’t apply to landlords acting through a limited company, where typical rental cover has remained at 125 per cent. This means that a limited company landlord could borrow a larger amount against the same property should they wish to maximise their leverage. If house prices fall in the event of a no-deal Brexit, landlords have a stronger position as buyers.
As more and more landlords consider limited company structures, brokers should ensure that they are aware of all the different products available to their clients and know which shouldn’t require their client having to pay a premium to access.
There is far more choice now than there was in terms of the products on offer, and landlords shouldn’t have to pay a premium to access finance. Above all, landlords should seek independent tax advice to check a limited company structure is the right route for their portfolio.
Specialist lenders such as Kent Reliance for Intermediaries offer the same rates for limited companies as private landlords. With the possibility of Brexit moving ever closer, limited company landlords are likely to be assessing their options. Brokers with good relationships with those lenders will be well-placed to support their clients.
Author: Adrian Moloney, sales director, OneSavings Bank
Date: 21st of October 2019