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Will setting up a limited company give you a cheaper buy-to-let mortgage rate?

Discover the tax and mortgage implications of incorporating your portfolio

Two thirds of portfolio landlords are planning on using limited companies to buy their next investment properties.

That's according to new research by Precise Mortgages, which shows that experienced landlords are using company structures to shield themselves from costly tax reforms.

Here, we explain the tax and mortgage implications of setting up a buy-to-let limited company.

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Portfolio landlords buying through limited companies

If you're considering investing in propertyor are a seasoned landlord looking to maximise your buy-to-let returns, you might be wondering whether it's worth setting up a limited company.

A new report by the specialist lender Precise Mortgages claims that almost two thirds (64%) of portfolio landlords (those with four or more properties) are planning on using limited companies to buy their next properties.

This is in stark contrast to landlords with smaller portfolios. Just 17% of investors with fewer than four buy-to-let properties plan on using a company structure.

Why set up a limited company?

In the past few years, a swathe of buy-to-let reforms have hit landlord profits, from the stamp duty hike for property investors to the tapering of mortgage interest tax relief.

The latter reform in particular is having a significant effect on investors who pay tax at the higher rate. In fact, a higher-rate-paying landlord letting a home for £950 a month could see their tax bill double from April 2020.

With profits under threat, some experienced landlords have chosen to set up buy-to-let companies. By using a company structure, landlords can offset all of their mortgage interest against their tax bills as a business expense, and instead pay corporation tax at a flat rate of 19% (18% from April 2020).

Some investors, meanwhile, have set up companies as a response to mortgage stress-testing changes brought in by the Bank of England's Prudential Regulation Authority, which mean portfolio landlords need to show their rental income will be at least 145% of their mortgage costs on each investment property.

The report by Precise claims that 73% of landlords believe stricter stress-testing has made it more difficult to secure finance, and this has resulted in some investors deciding a company structure provides an easier route to obtaining a mortgage.

The costs of setting up a buy-to-let company

While it's true that setting up a company will allow you to offset your mortgage interest, there are a range of costs involved - especially if you're transferring properties across to the new structure.

First of all, you may need to pay stamp duty on your current properties as you'll be 'selling' them to the company. You may need to factor in capital gains taxliability, too.

And while some landlords find the stress-testing process easier for limited companies, mortgage rates tend to be significantly higher than those available to individual landlords, despite more limited company deals coming on to the market over the last year.

Buy-to-let mortgage rates

Let's take a look at the different fixed-rate mortgages on offer to landlords operating as individuals and companies.

The chart below shows that the cheapest rates on limited company mortgages tend to be around 1% more expensive than those available to individual investors.

Buy-to-let company mortgages: three things to watch out for

  • Interest cover ratios:Lenders generally require your rental income to be at least 145% of your mortgage payments. On some deals, however, it's possible to obtain finance with an interest cover ratio of 125%. Lower interest cover ratios are more common on deals for limited companies than individuals.
  • Fee structures:Buy-to-let mortgages tend to have higher fees than owner-occupier deals, with up-front costs of around £2,000 not uncommon. In many cases, however, limited company mortgages charge a small fee (around £100-£150) plus a percentage of the loan amount. Some lenders charge up-front fees as high as 2.5% on limited company loans - on a £200,000 mortgage, that's £5,000.
  • Number of properties:Some lenders put limits on the number of mortgaged buy-to-let properties you're allowed to own. While some individual deals are only available to landlords with four or fewer properties, most company mortgages allow at least 10 properties. Some lenders instead impose a maximum total advance across mortgaged properties. This is usually around £3m-£5m.

You can find out more in our guide, buy-to-let mortgages explained.

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

With the complexities around running a property investment business and the need to keep abreast of the various taxation changes, it's easy to see why limited companies are primarily used by experienced portfolio investors, rather than 'accidental' landlords or hobby investors with one or two properties.

The decision over whether to set up a company involves a great deal of weighing up various financial implications.

For this reason, we recommend that you take professional mortgage and tax advice before moving your buy-to-let properties into a company structure.