Buy-to-let: Five reasons to consider not incorporating
by: BM Solutions
Do not advise a limited company deal for your landlord client before reading these key considerations
There’s no doubting the changing shape of the buy-to-let market. More purchases are now made under a limited company structure as a result of government interventions into the sector.
For some landlords, incorporating is the right option, but for many others it is not only unnecessary, it could be costly and over-complicated.
Here’s why you should think twice before recommending a limited company route to your landlord clients:
The tax myth
Limited company buy to let is often touted as a way for landlords to cut their tax bill but it doesn’t always afford them savings. Many landlords have opted for limited company status to avoid a possible financial hit from the reduction in tax relief that limits their ability to offset mortgage interest payments against income at their marginal rate of tax.
However, the government’s impact assessment of the measure found that four out of five landlords won’t pay more tax once the changes are fully phased in. In other words, most landlords won’t see an increase in their liability. In which case they may not be so keen to move to limited company status.
The best way your client can work out if there are tax benefits to them purchasing a property as a limited company is to seek independent and professional tax advice. It is never OK for a broker to give this advice or make assumptions regarding what might be best from a tax perspective.
The purchase slump
How many buy-to-let purchase deals have you dealt with in 2019? If you’re not a specialist buy-to-let broker, perhaps not that many. Purchase business made up just 25% of all buy-to-let mortgages in June 2019 with remortgaging accounting for three-quarters of business.
Of course, a client can remortgage and decide to transfer their property from personal to limited company status at the same time, but it can be complicated, difficult and expensive. It means effectively selling the property to the limited company and potentially triggering a Stamp Duty liability.
That’s why limited company buy to let is predominantly undertaken on purchase business, where it may or may not be the right option. If you are a mainstream mortgage broker it’s possible you haven’t come across a client this year that both wants to expand their buy-to-let portfolio with a new purchase and has been advised that their circumstances mean they are best suited to limited company lending.
The CGT implications
It’s not all about income tax. When a landlord sells a buy-to-let property as an individual they have a Capital Gains Tax personal allowance of £12,000. No such allowance exists with limited companies because they will instead pay corporation tax on any gains.
Which is best for your client depends entirely on their circumstances, so they need independent tax advice.
The CGT implications are not only triggered by selling buy-to-let properties. If your client decides to transfer an existing property into a limited company structure, it is technically a sale and purchase, so CGT could still be due from them as an individual seller (if over the personal allowance) as well as Stamp Duty from their limited company which is purchasing the property.
Incorporating can be complicated, and sometimes expensive.
The cost of mortgages
The good news is that limited company buy to let has become cheaper, as more lenders have launched mortgages in this niche sector.
But the cheapest deals on the market are still reserved for landlords buying on a personal basis with standard needs and circumstances.
According to Moneyfacts data in October, there were 419 fixed rate limited company buy-to-let mortgages compared to 1,992 fixed rate buy-to-let mortgages for those buying as an individual. Your client will have more limited remortgage options as a limited company.
And they’d pay more – the average two-year fixed rate for a limited company buy-to-let mortgage is 4.11 per cent, compared to just 2.96 per cent for standard buy-to-let mortgage.
The bigger picture
You wouldn’t recommend a mortgage to your client based solely on rate, without considering fees and their specific circumstances. That holistic approach should be taken with limited company buy to let – it’s not all about the potential tax implications of incorporating.
For example, your client will have to file their accounts at Companies House and prepare full accounts (not just submit a tax return), so their accountant’s bill will probably be higher, plus they may need to consider legal fees. They will also have to carry out more, time-consuming admin.
They need to weigh up the total costs and benefits of a limited company structure, with you and their tax adviser, to ensure that what they potentially gain in tax savings they don’t lose in other areas.
For the use of mortgage intermediaries and other professionals only
If you do not have professional experience, you should not rely on the information contained in this communication. If you are a professional and you reproduce any part of the information contained in this communication to be used with or to advise private clients, you must ensure it conforms to the Financial Conduct Authority’s advising and selling rules. Birmingham Midshires is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628. This information is correct as of November 2019 and is relevant to Birmingham Midshires products and services only.