Landlords with limited companies may earn £1,000 less a year

28 June 2017

Buy-to-let investors who buy their properties through a limited company could be £1,000 a year worse off due to higher mortgage rates, according to an independent mortgage broker.

Analysis by Private Finance found that a borrower with a limited company could expect to pay 3.41% for a two-year fixed 75% loan-to-vale mortgage deal, compared to 1.92% for personal borrowers.

In the past few months, setting up a limited company has been mooted as a way round recent buy to let tax changes, which are being phased in by 2021. These will see the tax relief that residential landlords get for finance costs, such as mortgage interest, being restricted to the basic rate of tax.

However, according to Private Finance, the high cost of mortgage borrowing for a limited company will outweigh any tax advantages for landlords who own fewer than four properties.

It cites the example of a landlord with one property who earns £46,010 annually (£35,000 base salary plus £11,010 in rental income – the average for a two-bedroom house in the UK). They will have £36,194 in take-home income after tax and mortgage costs have been deducted.

However, due to the higher cost of mortgage borrowing, if the same landlord bought through a limited company, Private Finance calculates that they would earn £34,825 in take-home income – that’s £1,369 or 4% less.

Mortgage costs for personal and limited company borrowers

Table 1: Mortgage costs for personal and limited company borrowers

In contrast, landlords with properties in limited companies will have a significantly reduced tax bill after subtracting mortgage interest costs from their rental income before calculating their corporation tax. This is even when they pay income tax on a salary as well as corporation tax. But Private Finance calculates that this saving can only be achieved if a landlord has four or more properties.

Limited company advantages

Table 2: Limited company advantages

Repurchasing into a limited company

Landlords who already have properties may be considering repurchasing into a limited company structure, but Private Finance points out that this incurs capital gains tax (CGT) and stamp duty, making it unsuitable for most small-scale landlords.

It gives the example of a landlord with five rental properties, earning £90,050 in total income (a £35,000 salary and £55,050 in rental income), who would have £53,768 in take-home pay once mortgage and tax costs are deducted when acting as an individual.

If the same landlord were to repurchase their homes under a limited company, they would have £54,584 in take-home pay. However, once CGT and stamp duty costs are paid, they would have just £5,374. Even over 10 years, their take-home pay would be £49,663 a year: more than £4,000 less per year than operating as an individual.

Shaun Church, director of Private Finance, says: “The option to invest through a limited company has come under the spotlight recently as landlords look for ways to offset recent tax changes. But landlords shouldn’t rush into this assuming it’s a safe bet for saving money.

“Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.

“Larger landlords might find the tax benefits associated with limited company ownership outweigh the higher cost of mortgage borrowing. Each investor is different and there’s no one-size-fits-all solution,” he adds.

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