Despite a property boom this year as the UK emerged from (and began to re-enter) lockdown, there is one set of UK home-buyers who aren’t necessarily reaping the benefits so easily: private landlords. The issue? Limited Company Buy-to-Let (BTL) mortgage lending.
Since the Government imposed stricter rules on tax relief for Buy-to-Let landlords in a bid to professionalise the sector, SevenCapital found that 43% of landlords now invest and manage their properties through a limited company – with a further 48% planning to or wanting to know how to.
However, with the pandemic and subsequent lockdown having now forced the UK – and much of the world into economic uncertainty – lenders have tightened their belts to avoid risk. Responsible landlords looking to buy via a limited company have been finding their applications being rejected and, where they haven’t, the rates on offer simply don’t add up:
|BTL mortgage type||Typical current LTV||Interest rate|
|Limited Company||50%||5% – 6%|
|Individual||75%||3% – 4%|
Looking at the above example rates, it’s a no-brainer to opt for the individual BTL mortgage as mortgage rates wins every time. But managing the property as an individual means you’re also subject to increased taxes and just a 20% tax credit on rental earnings, against the typical 18% corporation tax paid by a limited company on earnings after mortgage expenses have been deducted. This is why many ‘accidental landlords’ have recently exited the market and responsible landlords have chosen to incorporate.
Why have the rates increased for limited companies? Quite simply because if you own a property through a limited company it is far easier, should you go bust, to write off the debt and it have little effect on you personally or any other assets you own. If you invest as an individual then you are completely liable and the lenders can hold you solely responsible, potentially seizing other assets to pay for the loss.
So, what’s the solution? A BARE trust.
While it may not be the most straightforward or conventional way to invest, running a property through a BARE trust is a mid-term alternative – especially at a time when the mortgage market is on its knees and working through the BTL process as an individual may not be the most tax efficient way.
How would it work?
When it comes to purchasing a Buy-to-Let property, the mortgage LTV and interest rates are going to win every time. Right now, that means buying as an individual.
But, if you want to manage your property through a limited company because you get tax relief that no longer applies, this is where the BARE trust comes in. Once you’ve completed on the purchase, you set up a limited company then you trade the property through that via the BARE trust.
At the end of the tax year, HMRC should recognise that all the trading has been done through the Limited Company and so, all taxable income will be declared though that and you pay only the tax rates associated with a limited company, which is corporation tax.
Of course, that all sounds very simple, so you need to do your homework on the rates you personally can achieve and decide whether you prefer investing through a limited company or as an individual – after all, investing is circumstantial.
When the risk of a landlord going bust lowers because the UK’s economy recovers, lenders will likely reinstate better rates, which will make buying through a Limited Company feasible again. But right now, in our and our clients’ experience, the numbers just don’t add up.
It’s important to note that all investors are advised to seek advice from a financial adviser before entering any new investment deal.
For more information visit sevencapital.com.