As a sale and purchase transaction, incorporating your existing buy to let property into a limited company can be a costly business. While some costs are unavoidable, here are a few ways you can look to save money during the process.
The phased removal of income tax relief from 2016 to 2020 means investing through a limited company is now a more tax-efficient method for many buy to let landlords. Whether you’ve owned investment property since before the announcement of that legislation change, or your portfolio has expanded and changed your income tax position, incorporation can save some landlords a lot of money. However, you must seek professional tax advice before starting this process, as it’s not the most cost-effective investment structure for everyone!
Unfortunately, although you already own the property, it’s not a matter of merely remortgaging onto a limited company product. As a sale and purchase transaction, the process incurs Stamp Duty Tax and potentially Capital Gains Tax bills, making it a costly business! If, having first sought professional tax advice, the long-term saving of owning your investment property in a limited company outweighs all these tax costs, then it’s likely you’ll want to make the change. While you can’t avoid the taxman, here are some ideas on how you can save costs while incorporating buy to let property.
When it comes to solicitors, some buy to let lenders insist on separate representation, where the lender and borrower have different solicitors. In this situation, you may be liable for two sets of legal fees! However, some lenders do not insist on separate representation and are happy for you both to use the same solicitor. If this is a concern for you, your broker will be able to help you select a lender which best suits your circumstances.
Lender Arrangement Fees
If you’re looking to save money up-front, lender arrangement fees can be a significant consideration. Lenders charge arrangement fees as either a fixed price or a percentage of the loan amount. Which one of these methods works out cheaper entirely depends on your loan size, so is worth keeping in mind when you’re comparing mortgages.
Some lenders will allow you to add the arrangement fee to the loan, which keeps the initial set up costs down, but means you’ll be paying interest on the charge in the long run. If keeping initial up-front costs down is a significant consideration for you, then some limited company mortgages are available with no lender arrangement fees. Whereas a few years ago, only one lender offered arrangement fee-free limited company mortgages, there are now a few more in this market (though not many). There’s no right or wrong here; it entirely depends on what suits your financial circumstances at the time.
When you’re incorporating a personally owned buy to let into a limited company, chances are it’s been valued within the last five years (depending on when you purchased it or last remortgaged). While the value will have changed in that time (hopefully an increase), you may be reluctant to pay out for another valuation during the incorporation process. If so, many lenders now offer free valuations for limited company buy to let purchases!
I would caveat that while both free valuations and no lender arrangement fees can seem like an excellent deal on a mortgage, the cost of those elements is usually calculated into the mortgage rate. Just because there’s no up-front cost doesn’t mean that it’s the cheapest option across the life of the mortgage. However, if it’s up-front costs you’re keen to keep down, then limited company buy to let mortgages without these charges are definitely an option worth considering.
As with any property purchase, the larger your deposit, the more competitive the interest rates you’ll have access to, which could save you thousands over the life of the mortgage. When purchasing a personally owned property into a limited company, it is possible to use the property’s equity as all or part of that deposit.
If you own a number of buy to let properties, you may be able to boost your deposit by remortgaging and capital raising from another property (depending on the equity it holds). If you think this might be an option for you, we can do a free buy to let portfolio review and thoroughly investigate your investment options.
Early Repayment Charges (ERCs)
The majority of buy to let mortgages have ERC periods, meaning that should you want to break from that mortgage early, you’ll need to pay a percentage of the capital still owed. These usually last until the end of the fixed period of the interest rate i.e., a five-year fixed rate will usually incur five-years of ERCs.
To avoid this charge, most of our clients looking to incorporate, wait till the ERC period on the existing personal buy to let mortgage is about to expire. However, depending on your circumstances, it can sometimes be cheaper, in the long run, to break from a current rate, despite the ERCs. It will depend entirely on your tax position (seek professional tax advice!) and the limited company rates available to you. So, don’t completely write off incorporating now just because you are still within your ERC period.
It’s worth bearing in mind that your circumstances dictate your eligibility for a particular product, so you may not be able to save on all the points above. Rest assured, whatever your circumstances, we will work to achieve the best rate for you and always consider your preferences.
If you’re looking to incorporate personally owned property into a limited company, do get in touch! While we can’t offer any tax advice, we can make cost comparisons on available mortgages. Call me, Chris Longhurst, on 01732 471607 or email me firstname.lastname@example.org.