An increasing number of UK landlords have turned to limited companies as a vehicle for their buy-to-let investments. This shift has been significant, with a record 50,004 companies established for this purpose just last year, as revealed by Hamptons. The total number of buy-to-lets held within company structures has surged to 615,077, marking an 82% rise since the end of 2016. At first glance, the strategy seems to offer a clever workaround to recent tax changes. However, upon closer examination, the cost benefits might not be as clear-cut as they appear.
The Rise of Limited Company Buy-to-Lets
The surge in landlords opting for limited company structures can be primarily attributed to tax efficiency. Specifically, the ability to fully offset mortgage interest against tax bills—a benefit now denied to those purchasing properties in their personal names—has been a key driver. This change follows adjustments made by then Chancellor George Osborne in 2015, which reduced the tax relief private landlords could claim on their mortgage interest costs.
The Tax Relief Tug of War
Under the new system, individual landlords face taxation on their entire rental income, with a mere 20% relief on mortgage interest. In stark contrast, landlords operating through limited companies can deduct their entire mortgage interest from their tax liabilities, effectively being taxed on profits rather than turnover. While this seems advantageous, especially for higher and additional rate taxpayers, the benefits are somewhat mitigated by the generally higher costs associated with limited company mortgages.
Cracking the Numbers – Savings vs. Costs
Despite the tax savings, the decision to switch to a limited company structure is not without its drawbacks. Mortgages for limited companies often come with higher interest rates and fees. For instance, the difference in mortgage fees alone for a £200,000 property can amount to an additional £6,000, not to mention the monthly repayments which can be significantly higher over a five-year period. Thus, the initial tax savings might be outweighed by these increased borrowing costs.
The Evolving Mortgage Market
Interestingly, the gap between personal name and limited company mortgage rates has seen fluctuations over the years. Initially widening, this gap has recently begun to narrow, indicating a potentially changing market as more landlords adopt the limited company model. This shift suggests that increased competition among lenders could lead to more favorable rates for limited company mortgages in the future.
Government Actions and Future Implications
The government has already made moves to level the playing field, notably by phasing out the favorable tax treatment of furnished holiday lettings. This raises questions about whether similar measures could be applied to limited company buy-to-lets in the future. While such changes would increase government revenue, they could also lead to unintended consequences, such as higher rents for tenants or a reduction in the number of rental properties available.
Should You Go Limited?
The decision to use a limited company for buy-to-let investments hinges on various factors. Although corporation tax rates are lower than personal income tax rates, the process of withdrawing profits can introduce additional tax liabilities. Moreover, the administrative burdens and compliance costs associated with maintaining a limited company can be significant, especially for landlords with a smaller portfolio.
Ultimately, while there are certain advantages to holding buy-to-let properties in a limited company, the decision requires careful consideration of the financial implications, market conditions, and personal circumstances. Landlords must weigh the potential tax savings against the higher mortgage costs, administrative complexities, and evolving regulatory landscape. As the buy-to-let market continues to adapt, staying informed and seeking professional advice will be crucial for making the most of your investment strategy.