Adrian Moloney | 16.12.2020
In the years before COVID-19, landlords were hit by a slew of tax changes, causing many to consider alternative avenues – one of which being to seek loans through limited company structures.
If the current climate is anything to go by, existing limited company landlords are likely to be assessing their options for the next few years.
This is where brokers that have good relationships with key specialist lenders can be well-placed to support their clients, and be aware of the different products available, along with the factors their clients need to consider if they wish to explore a limited company set up.
It’s worth knowing that by incorporating, landlords could potentially have access to larger value loans. The PRA’s changes to underwriting criteria for individual private landlords mean that lenders now typically require rent to cover up to 145% of interest payment for private landlords.
However, these changes don’t apply to landlords acting through a limited company, with typical rental cover remaining at 125%. This means that a limited company landlord could borrow a larger amount against the same property should they wish to maximise their leverage, giving them a stronger position as buyers.
Limited company structures are popular amongst landlords looking to mitigate changes in taxation. Whilst individual private landlords will be taxed on their income, those acting through a limited company will be taxed on profits.
Limited companies now pay 19% corporation tax1 rather than income tax, which is 20% for basic-rate tax payers and 40% (or even 45% and above) for top-rate tax payers.
However, one of the advantages of a limited company structure is that investors who pay higher tax rates are able to offset the interest costs of their mortgages against their income.
This has obvious benefits, as, since last April, buy to let landlords (in personal names and excluding holiday lets) are no longer able to deduct any of their mortgage expenses from their rental income in order to reduce their tax bill2, and can now only reduce the gross tax bill by 20% of the annual mortgage payment.
However, seeing as limited company profits are not exposed to income tax while retained within the business, extra capital may be used to expand portfolios or refurbish existing properties, or for pension income.
If the landlord wants to take cash out of the company, an additional layer of tax will be due on any dividends paid out (up to 38.1% based on rates applying from April 2016)3. This means that both taxation for the company and individual must be considered when assessing costs associated with operating via a company.
Additional income and corporation tax rules apply to non-UK resident landlords. When considering these two layers of taxation, your clients should therefore weigh up whether it would be more tax efficient to hold their properties personally or via a company.
However, we must stress that each of your client’s circumstances is unique, and they should seek out independent tax advice to consider if a limited company is the right route for their portfolio. More information about tax can be found in our latest tax guide.
While the tax benefits of becoming a limited company are well known, there are other advantages to incorporating.
Limited company landlord can receive £2,000 of company dividends tax free, and as limited company profits aren’t exposed to income tax while retained within the business, this extra capital can be used to build portfolios or refurbish existing properties. Please note that this must only be done once, and cannot be done multiple times if the landlord has more than one limited company.
After this, and beyond your personal allowance, dividends are taxed at 7.5% until income crosses the threshold for higher rate tax payers. The rate then rises to 32.5% and 38.1% for additional rate taxpayers3.
The housing market is arguably feeling the effects of COVID-19. While some are biding their time for the right opportunity to increase their portfolios, there are still opportunities for those landlords with capital to spend.
But for limited company landlords able to keep extra capital within the company, they could be in a good position.
There is far more choice now in terms of the products on offer to limited company clients, so it’s important you know which lenders out there can serve your case needs.
With the support and experience of Kent Reliance for Intermediaries, we could help make your odd limited company cases that little bit easier. Combined with individual case assessments and our common-sense approach to lending, your limited company clients could find the answers they need with us.
Not only do we offer the same rates for limited companies as private buy to let landlords, we accept up to four directors per application, and are not constrained by strict SIC code requirements unlike other lenders.
We accept up to 75% LTV on loans as high as £3m, with shareholder deposits and director loans both considered acceptable sources of deposit. Plus, we’ll also consider newly formed SPVs and LLPs, and our dedicated panel of approved solicitors can provide both sole and dual representation on your client’s cases.
To see exactly how we could support you, view the five reasons to choose us for limited company lending.
Or if you have a limited company case, read our FAQs on limited company applications and see what you need to know before applying.
Whether your clients are looking to restructure their portfolios or they’re simply interested in limited company lending, call our broker liaison team on 01634 835791 and they’ll be happy to help.
For a more detailed discussion on how we can support your limited company case, speak to your business development manager, whose technical expertise and understanding of this style of lending could prove invaluable to your clients and their investment needs.
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