Should Cheshunt landlords use limited company buy-to-let ?

Nowadays the majority (60%) of landlords who buy properties use a limited company, three times the rate in 2016.

For those who are new to the subject, we’ll break down why more landlords are turning to limited companies, before addressing the downsides.

Tax savings

The main reason to invest using a limited company is to avoid a punitive tax change, which only affects landlords operating as individuals.

Before April 2017 individual landlords could deduct their mortgage interest costs and expenses from their rental income when declaring their profits to HMRC.

But this was scaled back from 100% of mortgage tax relief in 2017 to nothing in 2020.

Nowadays landlords operating as individuals only receive a reduction on their final tax bill of up to 20% of mortgage interest costs.

In effect this means landlords are being taxed on profits they’re not making, while it’s also pushing some into a higher tax bracket.

Avoiding this change is the main reason people are investing through limited companies.

How you’re taxed

Instead of paying income tax – which is 40% for those in the higher income tax bracket – you’re subject to 19% corporation tax and 32.5% dividends tax.

‘Dividends’ is effectively money you ‘pay yourself’ based on the cash your limited company generates, and you’re entitled to withdraw £2,000 tax free ever year.

Small scale landlords

Small scale landlords with one or two properties have less to gain from using a limited company, as less of their ‘profit’ is going to fall into the 40% income tax bracket.

However if you’re a new investor it may still be worth using a limited company, as it means there’s no need to incorporate down the line and you can add to your portfolio later without thinking about the tax consequences.

It depends on your level of earnings and your ambitions as a budding investor.

Twice the tax stamp duty

For those who are already operating as individuals, there’s one big downside to transferring to a limited company – you’ll have to pay stamp duty again, including the 3% surcharge.

When you transfer a property into a limited company it counts as buying the home a second time.

This almost certainly explains why some landlords operate as individuals somewhat unwillingly – they’ve clearly made the call that it’s not worth the upfront costs, but if they were a new investor they would use a limited company.

This isn’t the only cash you need to hand over to operate as a limited company, as you’ll need to pay capital gains tax, legal fees and potentially valuation charges.

In many cases, whether it makes sense to go for the limited company route depends on whether you’re going to be involved in the market long enough to make these upfront costs back.

Higher mortgage rates

While landlords are adapting to the tax changes, mortgage lenders haven’t been so quick.

Only a quarter of UK mortgages are available to landlords via a limited company – and with this lack of competition the interest rates are higher.

Some lenders also charge a premium for limited company buy-to-let mortgages compared to their range for individuals, so mortgage costs will usually be higher.

The one upside is you’re usually able to borrow 125% of your rental income when using a limited buy-to-let mortgage, compared to 145% for an individual higher rate taxpayer.

In effect this means you can borrow more money with the same level of tenant income.

Conclusion

It does make sense to invest using a limited company in the majority of cases these days.

The more you earn and the more properties you own this becomes more apparent.

If your earnings are lower or you anticipate selling your investment property in a few years, it may not be worth the hassle and costs involved of using a limited company structure.

However if you want to be a buy-to-let landlord for a number of years it can definitely pay off, even if you have to transfer your properties from an individual to a limited company buy-to-let structure.

We would always recommend you get professional advice from a good accountant before making such a decision.