Here are some factors to consider when making such a decision.
Tax benefits
Limited company landlords can claim 100% mortgage interest relief. They also get benefit as a lower rate Corporation Tax on their profits than Income Tax. This is a significant advantage compared to private landlords who only get mortgage interest relief at the basic rate income tax. All rental income earnings are subject to taxation.
However, mortgage interest rates are more high than usual, so the benefits of a limited company to Buy to Let property tend to favor higher-income taxpayers and multiple property landlords. Talk to a tax advisor about your specific circumstances.
Rising interest rate
Finance costs have been kept low by low-interest rates in recent years. We expect the market will move towards a higher interest rate environment, as the Bank of England has recently raised the base rate for first time in three years. Many landlords will feel the financial consequences of this change as their monthly repayments will likely increase once their current fixed rate ends. This will make it easier to predict any future financial fluctuations.
Market trends
The way people live and work is another change. There has been a shift in housing demand from large cities to smaller towns and villages since the pandemic. To find the best place to invest, look at local trends.
Limited liability
Investor’s personal finances are protected in case of a limited company landlord. Investor’s liability for anything that goes wrong is limited to what he has invested in the business. This risk can be further reduced by purchasing professional indemnity or personal liability insurance.
Reporting and strict recordkeeping
Limited company setups require more administrative work. You must also keep accurate financial records throughout each year. Companies House requires you to file company accounts, an annual tax return for your business and your usual self-assessment Income tax return. All of this adds up and results in higher accountancy fees.
As part of the digitalisation of UK Tax, all VAT-registered companies will be required to keep digital records and submit VAT returns through Making Tax Digital (MTD) starting 1 April 2018.
Future Planning
Consider what you would like to do with your property in future. A limited company is a better option if you intend to transfer ownership to a family member. A professional tax advisor can help you understand the implications of Inheritance Tax and Stamp Duty as well as Capital Gains Tax.
Arranging the right Mortgage Finance
In recent years there has been increased competition among lenders to provide mortgage financing to limited company landlords. This has made it even more important to speak to an independent broker in order to find the right mortgage.
You should also remember that limited company mortgage criteria require the company to be set-up as one of these:
* Special Payment Vehicle (SPV – A company that is created to serve a specific purpose. In this case, it’s for the management and purchase of Buy to Let properties.
* Trading company – Typically an existing company that is looking to purchase a Buy to Let property to increase its portfolio.
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