Buy-to-let mortgages - setting up for a limited company

Leith - ltd company 887 x 300

 

The buy-to-let market in Edinburgh and surrounding areas continues to be buoyant partly due to relatively low interest rates and increasingly rental yields. HMRC however have introduced a number of changes to initial costs and the way income tax relief on rental income is calculated.

A 3% Additional dwelling tax (ADT) is now levied on second properties with a purchase price over £40,000, and the way tax relief is calculated is being changed with a gradual phase-in over the next four years. This will have the effect of higher rate tax payers effectively paying more tax on the rental income received. The change is not so onerous for basic rate tax payers and they may see little difference in the amount of tax they actually pay. However, for basic rate tax payers close to the higher rate threshold it may have the effect of pushing them in to the higher rate bracket, thereby meaning they may also pay additional income tax.

We have seen an increase in clients looking at purchasing buy-to-let opportunities through their own limited company rather than as an individual which was much more common in the past. If you are considering this option it is important you understand the advantages, disadvantages and responsibilities associated with this course of action. We would always highly recommend clients seek independent tax and legal advice before proceeding at this course of action is not always the best way to proceed in all circumstances.

Advantages

As mentioned above, the amount of buy-to-let tax relief for individual landlords will be progressively cut from a maximum of 45% to 20% for higher rate tax payers, but this change does not affect limited companies.

In 2016 the dividend tax credit was replaced by a new tax-free dividend allowance of £5000, so clients can potentially receive some tax free dividend from the limited company.

Clients could potentially grow a buy-to-let portfolio more quickly within a limited company as there will be no income tax on the retained profit, thus allowing more cash to reinvest.

Disadvantages

No capital gains tax allowance when the company sells a property. Individuals would have a capital gains tax allowance, doubled where the property is owned jointly.

As a limited company there will be additional costs involved. These would include preparation of company accounts, corporation tax calculations for HMRC, legal fees and annual auditing if applicable.

Many lenders currently do not offer mortgages for limited companies so there will be a restricted choice and possible higher interest rates.

 

It is crucial a client gets independent tax and legal advice prior to considering this option. As an independent financial advisers, ESPC Mortgages can help with all aspects of understanding your budget, applying for a mortgage and dealing with the relevant insurance requirements. Pop in for a no obligation chat with myself or another member of the team at our Edinburgh Information Centre or give us a call on 0131 253 2920.

The information contained in this article is provided in good faith. Whilst every care has been taken in the preparation of the information, no responsibility is accepted for any errors which, despite our precautions, it may contain.

The initial consultation with an adviser is free and without obligation. Thereafter, ESPC Mortgages charges for mortgage advice are usually £350 (£295 for first-time buyers). YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOANS SECURED AGAINST IT.