SHOULD YOUR CLIENT USE A LIMITED COMPANY FOR THEIR BUY-TO-LET TRANSACTIONS?
At Brightstar, we would strongly recommend clients talking to their accountant or a tax specialist before making any decisions as the advice can vary widely depending on their personal circumstances. It is important that clients deal with a broker who has strong knowledge of the buy-to-let sector, PRA regulations and the products available for limited companies.
It is also important that your clients understand the advantages and disadvantages of using a limited company. And the responsibilities of new directors in the new business, especially for those who are not currently company owners.
WHAT ARE THE ADVANTAGES OF USING A LIMITED COMPANY?
- Higher tax relief – From 2017 to 2020 individual buy-to-let investors (buy-to-let owned in the clients own name) will see their ability to offset interest payment expenses phased out by HMRC. The tax authorities will allow a tax credit but this is limited to the standard rate of 20%. It means higher rate taxpayers will see their tax bills rise. For limited company investors, the interest payment expense is still fully allowable against gross rental.
- No income tax when re-investing profits on property purchase – A limited company will pay no income tax on the retained profits which will allow more cash to re-invest. Clients will, however, need to discuss corporation tax with their accountants which is payable on trading profits.
- Drawback of personal funds – The initial investment made personally by the individual (i.e. deposit) can be drawn back from the company so long as it is classed as a director’s loan.
- Potential personal tax savings – Corporation tax is currently set at 20% which means the tax liability is reduced compared to a higher rate tax payer at 40%. The income taken from the business is controlled by the client and therefore there is the opportunity to reduce the personal income tax liability.
- Change of property ownership – The companies’ directors or shareholders can be changed at any time. The addition of a new partner to the business could help to raise capital for future investment purposes and portfolio expansion.
- Borrowing ability – Many lenders will not include personal expenditure when calculating the amount clients can borrow so there is the potential to increase the loan size.
- In addition, the PRA regulation state that limited company applications are stress-tested at a lower level than those completed in an individual’s name. This would also allow for increased borrowing.
WHAT ARE THE DISADVANTAGES OF USING A LIMITED COMPANY?
- No capital gains tax allowance – There are no CGT allowances for limited companies. The personal CGT allowance for 2017/2018 is £11,300.
- Property transfer – A property cannot be transferred into a limited company name by way of a re-mortgage. This would need to be completed as a purchase by the limited company and therefore stamp duty, legal costs and CGT may become payable.
- Lack of choice – There are still a limited number of lenders lending to limited companies and not all buy-to-let lenders have products. However, more lenders are entering this market and the rates being offered are often the same as those given to an individual.
- Higher legal costs – Conveyancers will often charge extra fees when handling a limited company transaction and many lenders may insist on separate legal representation with the cost paid by clients.
- Personal guarantees – Most lenders on special purpose vehicle (SPV) limited company applications will insist on personal guarantees being given by all directors in the business.
When using a limited company to purchase or re-mortgage property most lenders will only lend to an SPV limited company. The appropriate SIC Codes are below:
68100 – Buying and selling of own real estate, 68209 – Other letting and operating of own or leased real estate, 68320 – Management of real estate on a fee or contract basis
To discuss buy-to-let criteria or any other specialist lending enquiry, contact our helpdesk today on 01277 500900 or email firstname.lastname@example.org
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