Buy-to-let landlords could lose up to £1,000 a year if they decide to purchase through a limited company, a new study has found.
The analysis — conducted by mortgage broker Private Finance — has looked into mortgage rates and identified when purchasing through a limited company is worthwhile, and when it isn’t.
In recent times, increasing numbers of investors have been purchasing properties via limited companies to avoid some of the buy-to-let tax changes introduced in April, however, incorporating may not always be the best option.
Private Finance say personal borrowers can expect to pay better rates on mortgages at any loan-to-value (LTV) ratio, compared to those looking to borrow through a limited company.
For a two-year fixed 75 per cent LTV mortgage, the analysis claims that limited company borrowers can expect to pay 3.41 per cent, while a personal borrower will pay just 1.92 per cent.
Landlords who form a limited company to invest are excluded from the recent tax changes, including the phasing out of mortgage tax relief.
However, Private Finance argue that for smaller landlords — for example, those who only own one rental property — it makes more sense to personally borrow, as the tax advantages that come with incorporating are unlikely to outweigh the higher rates on limited company mortgages.
Shaun Church, director of Private Finance, said: “The option to invest through a limited company has come under the spotlight recently. 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."
However, purchasing through a limited company may still be the best option for those who own multiple properties, and the report seems to indicate that four properties is the tipping point for reaping the benefits of incorporation.
Church says that for larger landlords the tax benefits may outweigh the higher borrowing costs. However, he added a word of caution:
“Each investor is different and there’s no one-size-fits-all solution. Landlords should ensure they seek professional advice on how best to maximise their profits.”
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
22 June 2020 • 9-minute read
How to start a clothing business. It can be an all-consuming process but with that first sample run and customer sale comes great…
6th Floor99 Gresham StreetLondonEC2V 7NG
Sol House29 St Katherine's StreetNorthamptonNN1 2QZ
© Copyright 2021 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.