The Chancellor’s announcement in the summer Budget that he intends to reduce the tax relief available to wealthier landlords to 20% from April 2020, has certainly set a number of hares running.
In response, some investors are considering purchasing, and even switching ownership of existing rental properties, via limited companies. But do limited companies provide the perfect solution for higher rate taxpayers and what issues do landlords need to take into consideration?
Owning property within a limited company is not a new idea and limited company status simply provides investors with a different tax ‘wrapper’. It’s not dissimilar in conceptual terms to an ISA being a tax-efficient ‘wrapper’ for savings.
Limited company status does not, of course, offer a tax-free haven but it does mean that from a tax perspective landlords will be able to continue treating mortgage interest payments as an expense, whilst paying corporation tax on his or her profits at a rate of 20% (or 18% from 2020). However, if profits are to be withdrawn from the business as dividends, then the amount of tax due on those dividends needs to be taken into consideration.
I don’t intend going into the in’s and out’s of tax planning in this article, as the subject is both complex and dependent on an individuals circumstances and aspirations. Suffice to say that investors don’t need to panic and make any knee-jerk decisions; they have plenty of time to consider their options and take professional advice before making any changes.
I would, however, like to highlight some important factors from a borrowing – and lending – perspective of using limited companies to acquire rental properties.
Investors can buy and hold property either as individuals or via a limited company. As individuals, property can be held in a sole name or can be held in the name of a spouse or civil partner. Some higher rate taxpayers will undoubtedly be considering transferring property into a spouses name and it’s certainly a valid option.
Another option, as mentioned above, is to hold property within a limited company, either an existing trading business or a Special Purpose Vehicle (SPV) set-up specifically to own investment property.
Many business owners have invested surplus company cash in rental property rather than holding cash in low yielding business savings accounts. There’s nothing wrong with using an existing trading company for this purpose, providing it doesn’t inadvertently change the nature of the business from being a trading to an investment company.
The other option is to set-up a SPV specifically for the purpose of owning rental properties. The benefit of an SPV is that it effectively ring-fences the asset and some lenders will only lend to SPVs.
However, some pundits would say that, from a lender’s perspective, lending to a trading company is less risky than lending to an individual, because the lender can make a charge over the business’s assets. However, in reality there is really little difference between the two, because lenders’ will ultimately focus on the directors and shareholders, rather the company itself. Invariably, lenders will seek personal guarantees and debentures in the form of a fixed and floating charge over the assets owned by the company and, in the event of needing to take possession, will focus on recovering the outstanding debt from the directors of the business.
The good news is that although there are only a handful of lenders that currently offer mortgages via limited companies and SPVs, there are an increasing number of lenders who are planning to launch into this sector and the choice will therefore widen in due course.
Over the coming months, some landlords will make the decision to move existing properties into a limited company structure. Technically, they will be transferring an asset from one legal entity to another and the transaction will therefore be classed as a purchase and they will need to consider issues such as stamp duty and capital gains tax.
What’s more, because the transaction is a purchase, lenders may ask for a deposit to be paid from the limited company’s cash reserves, which could be an issue for the owner. It would be far preferable, from the perspective of the deposit, if the transaction were treated in the same way as a remortgage, which would mean that the deposit does not have to deplete the business owners’ cash reserves.
RLA Mortgages/3mc is currently working with a number of lenders to help them develop their proposition for landlords wanting to transfer property into limited companies and we’re excited at the prospect of new lending solutions and greater competition in this important market over the coming months.
The Chancellor’s decision to change the tax relief available to landlords is inevitably going to cause a lot of head scratching and there’s no simple, one size fits all, solution. The right answer will depend on your personal circumstances.
For further information on Buy to Let mortgages both for individuals and limited companies please contact RLA Mortgages on 0844 858 4420 or visit the website www.rlamortgages.co.uk
Please note lenders have different minimum criteria requirements and not all landlords and property types will qualify for this specific product. For further information contact RLA Mortgages.
This is a financial promotion and in no way should it be viewed as a personal recommendation or advice. Before a recommendation/advice can be given you should seek independant mortgage or financial advice.
RLA Mortgages is operated exclusively for the RLA by 3mc, which is authorised and regulated by the Financial Conduct Authority. FCA No. 302992. ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Although the FCA regulate the way the majority of mortgages are sold, in most cases they do not regulate buy to let mortgages. This means you may have less protection if things go wrong with a buy-to-let mortgage. All calls are recorded for training and monitoring purposes.