Limited company borrowing for buy to let has become quite en vogue of late and for good reason, but before we look at what has thrown it into the spotlight, let’s go back a little bit, because actually, it has been knocking around for a long time.
Pre-2016, the main reason that people put their property into a limited company was for tax efficiency (so no change there) but there was no single reason for this improved efficiency and for many landlords the reduced tax in one area might have been offset by increased taxes and costs elsewhere.
Hence there was no solution that would be right for most investors - indeed some clients would hold some of their properties in limited companies and some they would own personally which offered a degree of flexibility in managing their portfolios and the taxes due on rental profits and capital gains.
The general principle though was that both Income and Capital Gains taxes were slightly lower in a limited company structure – but profits were then subject to a second layer of tax when the investor wished to take money out of the company.
Now however, there is a new and more important reason why limited company borrowing is fast becoming the main way to own buy to let property. Again this all relates to tax but this time it relates exclusively to Income Tax.
Essentially, if your income including rental income (net of expenses other than interest) takes you into the higher rate tax bracket you will be paying tax at 40% or even 45% on your rental income, but you will only be able to offset your property financing costs at the basic rate of tax (currently 20%).
For some this will make a relatively small difference to their finances, to others this will mean that the Income Tax on their buy to let income will (in future) exceed their profit from letting out property – and this is obviously not a sustainable position to be in.
Another reason people are doing this limited company thing, which is lesser known, is for Inheritance Tax planning. If you set up a limited company, you can issue shares to your children which will give them a percentage ownership of the company.
You can increase this share at a later time should you wish (although just be wary of restrictions on your mortgage should you have one). Whilst there may be some (tax) cost to doing this, it does allow ownership to be more fluid between family members.
So there we are, three reasons why Ltd Company borrowing is becoming increasingly popular.
I would also add at this stage, we are mortgage brokers, not tax advisers, so before you make any decisions about how to own your rental property, you should always seek specialist tax advice.
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