The Government is changing the rate of tax relief for higher and additional tax rate landlords (those paying 40% and 45% tax respectively) who own buy-to-let property.
These landlords will only be able to claim tax relief on finance costs such as mortgage interest, at 20%. This change is being phased in, starting this year when one quarter of interest will be affected by the restriction.
The changes will also affect landlords whose total income (including buy-to-let income, but before deducting finance costs) pushes them into the higher tax bracket. It does not, however, affect landlords who own their buy-to-let property in a corporate vehicle such as an Special Purpose Vehicle (SPV) limited company.
How does it work?
Borrowing through a limited company is more tax efficient than borrowing personally due to these new restrictions not affecting limited companies. Limited companies pay corporation tax instead of income tax.
Income tax is still relevant, though, as the owner of the company must take out net income from the company, where income tax on salary then comes into play.
A limited company mortgage application from a newly-established SPV usually takes the same amount of time to process as a personal mortgage application. However, if your SPV has an existing property portfolio, then the application takes a little longer due to checks being carried out on both the business and individual(s).
Many lenders don’t offer mortgages for SPV or limited companies, which is why it is imperative to discuss your options with one of our mortgage advisers who can utilise a wide panel of funders to find you the right deal for your circumstances.
You may even find that you can borrow more via a limited company mortgage application, as guidelines introduced by the Prudential Regulation Authority (PRA), which introduced tightened affordability checks for those borrowing personally, do not apply to limited companies due to them not paying income tax.
What’s the difference between an SPV and a trading limited company?
A Special Purpose Vehicle (SPV) is set-up for the sole purpose of holding property only, whereas a trading limited company is used to run a business.
SPVs are often seen as an easier application to process by lenders, as they require less checks and understanding than a trading limited company.
If you are thinking about setting up an SPV, it can easily be done online through the Government website. You will then be able to borrow straight away through the SPV, as you will provide a guarantee to the lender should the SPV be unable to make the repayments.
What if I have personally owned rental property I want to sell?
You will be required, by law, to sell the property to your company. This means you will pay Capital Gains Tax (CGT) and stamp duty (SDLT) on the purchase, including a 3% surcharge.
To discuss your options when it comes to limited company buy-to-let mortgages, talk to our specialist mortgage advisers.