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.
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.
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.
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.
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.
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.
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.