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Buy-to-let company mortgages soar: so should landlords incorporate?

Fixed-rate offers reach all-time high for landlords who incorporate

New data shows that the number of mortgage deals on offer for buy-to-let companies has hit a record high. But do these offers really represent a good deal?

Here, we take a look at the current mortgage market for buy-to-let investors, and explain the key things you should know if you’re considering setting up a limited company.

  • For impartial, expert advice on finding the right mortgages for your portfolio call Which? Mortgage Advisers on 0800 197 8461.

Buy-to-let company mortgages triple in two years

In April, the number of fixed-rate mortgage deals on offer for buy-to-let limited companies reached the highest level since records began, according to data from Moneyfacts.

Month Number of mortgages
April 2016 80
April 2017 212
April 2018 235

This means that the total number of deals available to buy-to-let companies increased to 235, up from 212 in April last year.

Remarkably, this represents a near 300% increase since April 2016.


Buy-to-let incorporation: why are landlords setting up companies?

So, why are lenders flocking to offer mortgages for landlords who incorporate?

A swathe of taxation changes over the past couple of years have made buy-to-let a less attractive proposition for many individual investors.

But the rules around tax on investment properties works slightly differently for limited companies – prompting an increasing number of landlords to shift their portfolios to a company structure.

Mortgage interest tax relief

Until April last year, landlords could subtract the interest on their mortgage when filing their tax return. And given many landlords have interest-only mortgages, this was a considerable incentive.

For the 2017-18 tax year, however, this relief reduced to 75% – and will continue to reduce by 25% each year until it hits zero from April 2020, when landlords will instead be given a 20% tax credit.

This means that those who pay income tax at a higher rate (40% or 45%) will need to pay significantly more, while some basic-rate taxpayers could be pushed into a higher tax bracket depending on their other income.

Our calculations show that a higher-rate paying landlord letting a home for £950 a month, with mortgage interest payments of £600 a month, will see their tax bill almost double to £3,120 from April 2020 – a significant outlay, especially for landlords with large portfolios.

Wear and tear allowance

Landlords letting furnished homes were once able to write-off 10% of their annual rental income when filing their taxes, regardless of how much they’d spent on maintenance.

This was known as the ‘wear and tear’ allowance. But the rules were changed in 2017, meaning landlords could only claim for actual expenses they’d incurred.

These tax burdens such as these have led landlords to look towards incorporation – but is it worthwhile?

Individual vs company buy-to-let mortgages

While there are benefits to setting up a company for your buy-to-let portfolio, these can be outweighed by the comparative cost of mortgages.

Indeed, the average two-year fixed-rate buy-to-let mortgage for a company is currently at 4.29% – considerably more expensive than the 3.01% available for the rest of the market.

True cost analysis by Moneyfacts shows that when comparing the cheapest deals currently available (by initial rate), the savings for individual borrowers are significant.

At 60% loan-to-value (LTV) based on borrowing of £150,000, individual borrowers pay £2,415 less over the two-fixed period, while at 75% LTV the savings are even higher, at £3,463.

60% loan-to-value: true costs

Type of mortgage Provider Initial rate Fees True cost over two years
Individual Virgin Money 1.37% £1,995 £16,288
Company Danske Bank 2.78% £999 £18,703


75% loan-to-value: true costs

Type of mortgage Provider Initial rate Fees True cost over two years
Individual Virgin Money 1.75% £1,995 £16,907
Company Vida Homeloans 3.19% £1,995 £20,370

Other drawbacks of forming a buy-to-let company

As a business, you’ll be able to offset tax on your mortgage interest as a business expense, so that you won’t be mercy to the mortgage interest tax relief changes.

But while this might sound appealing, incorporated business face other costs that can stack up quickly.

First, you’ll have to pay corporation tax on your profits, rather than income tax.

You could also take a major hit from stamp duty when setting up your company.

HMRC will consider you to be ‘selling’ your properties to the business, so you’ll be subject to the extra 3% surcharge required of buy-to-let investors – and you’ll need to factor in any capital gains tax liability, too.

Is it worth setting up a buy-to-let company?

As ever with these decisions, it depends largely on your personal circumstances.

With this in mind, we strongly recommend that you take expert advice on the taxation issues you would face before you consider setting up a company.

And while there’s no hard-and-fast rule, incorporating isn’t for the faint-hearted.

The complexities around property investment as a business and the various taxation changes mean incorporating may be best reserved for landlords with large portfolios.

If you’re an ‘accidental landlord’, or hold a couple of investment properties, you may be better off acting as an individual instead.

  • If you’re a buy-to-let investor and you need some advice on your mortgage options, fill out the form below for a free callback from Which? Mortgage Advisers.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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