Buy-to-Let Mortgages for Limited Companies: Pros, Cons, and Key Considerations.

Overview of Buy-to-Let Mortgages for Limited Companies

In recent years, there has been a significant shift from purchasing buy-to-let (BTL) properties in personal names to purchasing them through limited companies, especially Special Purpose Vehicles (SPVs). This approach has become increasingly common and now represents more than half of the applications in the commercial finance sector. Here’s an overview of the key elements regarding BTL mortgages for limited companies.

Key Definitions

• SPV (Special Purpose Vehicle): A limited company created solely for owning and managing investment property.

• Trading Business: Any limited company involved in regular business activities (anything from a car repair garage to large corporation).

Lender preferences vary between SPVs and trading businesses. While many lenders accept applications from SPVs, fewer lenders support property purchases within a trading business. The focus here is on SPVs for investment property ownership.

Pros of Limited Company Buy-to-Let Mortgages

Mortgage Interest Relief:

• In a limited company, mortgage interest can be deducted as a business expense, which may lead to significant tax savings.

Corporation Tax Rates:

• Corporation tax is often more tax-efficient than personal income tax when owning property in a limited company. This can offer better overall tax management depending on profit levels.

Estate Planning Advantages:

• An SPV can facilitate easier estate planning. Shares of the company can be passed to family members (e.g., children or grandchildren), which may reduce inheritance tax liability and ensure the continuity of the property business.

Cons of Limited Company Buy-to-Let Mortgages

Personal Tax on Withdrawals:

• Although the corporation tax rate may be lower, taking money out of the company (via salary or dividends) has personal tax implications. This needs to be factored into the overall strategy.

Capital Gains Tax (CGT):

• Unlike personal ownership, companies do not have an annual CGT allowance. Therefore, when a property is sold by an SPV, any capital gains will be subject to corporation tax, which could be higher than the personal CGT rate.

Additional Administrative Costs:

• Operating an SPV involves additional administrative tasks and costs. These include annual Companies House filings, corporation tax returns, and preparing yearly accounts, which may require professional assistance.

Costs of Transferring Existing Properties:

• Transferring properties from personal ownership to an SPV is treated as a sale and purchase. This involves the potential payment of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) charges, which can be costly.

Conclusion

While there are clear benefits to using a limited company (especially an SPV) for buy-to-let investments—such as mortgage interest relief, corporation tax benefits, and estate planning—there are also significant drawbacks. These include personal tax on withdrawals, CGT implications, administrative costs, and the complexities involved in transferring existing properties. It’s essential to consult with an accountant or tax specialist to determine whether purchasing through a limited company is the best strategy for your specific situation.

Remember, the details of your tax and financial situation will be crucial in deciding the best approach.