A limited company buy-to-let mortgage is where you purchase a buy-to-let property through a limited company or SPV (Special Purpose Vehicle). For a large percentage of property investors, the tax benefits of buying a property through a limited company can be considerable (particularly for higher or additional rate taxpayers).
When it comes to personal buy-to-let mortgages, the income generated from your rent is added to your overall personal income. This might be enough to nudge some investors into a new tax bracket with a higher rate. Corporation tax, however, is set at a static main rate – 19% for 2020 – 2021.
So unless the Government changes it, that’s the maximum you’ll be charged.
After April 2017, there was a marked increase in the number of landlords choosing limited company buy-to-let mortgages over personal ones. This shift was largely driven by changes outlined by the UK government in the 2017 Budget, including a reduction in the amount of tax relief available for interest on BTL mortgages.
Prior to 2017, landlords paid tax on the net rental income after allowable expenses, such as mortgage interest. As a result, higher and additional rate taxpayers could claim relief at 40 and 45% respectively. From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax which is currently 20%.
Limited company buy-to-let mortgages can also be a viable option for people who want to purchase property as a collective and for those who want to distance themselves from personal liability if something goes wrong down the line.
Although a lot of high street mortgage lenders don’t provide limited company buy-to-let mortgages, some more specialised vendors do. We work with a range of lenders across the whole market who might be able to help, so if you’re thinking of incorporating for buy-to-let, get in touch.
Criteria for getting a limited company buy-to-let mortgage
As with personal buy-to-let mortgages, eligibility criteria varies from lender to lender, however many will factor in the following:
- An existing special purpose vehicle (SPV) limited company
- An existing trading limited company (not an SPV)
- Starting up a new ltd company at the time of purchase
- Limited companies with personal guarantees (PGs)
- Limited companies without personal guarantees (PGs)
- Up to 85% loan to value (LTV)
- Rental income needs to be at least 125% of mortgage payment
- Minor adverse credit accepted
(Source: Online Mortgage Advisor)
What is a Special Purpose Vehicle (SPV)?
According to Investopedia, “a special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.” An SPV can be used by people investing in buy-to-let properties.
There numerous are positives and minuses to purchasing a buy-to-let property via a limited company as opposed to under a personal name. It largely depends on the individual’s circumstances, particularly in the light of recent and upcoming changes.
To find out about the benefits and drawbacks of limited company buy-to-let mortgages, we’d always recommend speaking to a tax specialist.
For more information on the types of mortgage on the market today, visit gov.co.uk.