From April 2017, Mortgage Interest Relief is being phased out meaning as of April 2020, mortgage interest will no longer be an allowable expense for individual residential property investors. For many, purchasing an investment property will seem like ‘buying to lose’. These changes will not apply to companies that hold residential property meaning that purchasing property in a limited company could be a ‘buy to win’ for those likely to exceed the basic-rate band.
Table 1 below shows how the changes will affect a higher rate taxpayer who purchases as an individual a £300,000 investment property, the typical cost of an Inspired home in Greater London, with a 3.85% interest only mortgage and 70% LTV (loan-to-value). The investor’s profit after tax would shrink from £2,277 currently to only £1,873 after April 2017, with profits continuing to fall year-on-year reaching a net profit of only £660 in 2020.
Table 1 – purchasing as an individual
Buying through a company does have some drawbacks. Many buy-to-let lenders won’t lend to limited companies meaning that you will have to raise finance from a commercial lender. As a result, interest rates may be a little higher and the lender is likely to offer lower LTV ratios, typically not exceeding 70% of the purchase price.
According to commercial mortgage broker B2B Commercial Mortgages, who offer limited company buy-to-let mortgages, an investor purchasing a £300,000 property generating rental income of £13,200 per annum will be looking at an interest rate of 3.85%, though rates vary depending on whether you are a first time or experienced property investor. Interest only mortgages are available and can be taken over a 25-year term. B2B Commercial Mortgages has received a surge in enquiries for limited company buy-to-let mortgages since the changes to Mortgage Interest Relief were announced in November 2015, highlighting the appetite from investors to buy through limited companies.
If you hold property within a company, the profits will be liable for Corporation Tax (19% in April 2017, falling to 18% in April 2020). You will not have to pay Capital Gains Tax (at 28%) when properties are sold, but you will have to pay Corporation Tax on the profit – ‘chargeable gain’. You will also have to pay Tax on dividends (32.5% for higher rate taxpayers) if you take profits out of the company, which is why some investors choose to let returns build up in the company for a pension pot or to fund their next property purchase. There is also a £5,000 Dividend Allowance which will reduce your tax liability.
Table 2 below shows how the figures would stack up if you purchased through a limited company. The example assumes that the investor withdraws 100% of the net profit as a dividend payment and has used up their £5,000 Dividend Allowance, as can often be the case if you receive dividends from shares or other companies.
Table 2 – purchasing through a limited company
Table 3 below shows that investors would be £202 a year worse off currently, but £202 better off from April 2017 and £1,441 better off in 2020.
Table 3 – how the two structures compare
While 2016 was not the best year for buy-to-let, 2017 seems to be getting off to a promising start in terms of demand from landlords looking to add to their property portfolios.
Speaking recently to Landlord Today, Bob Young, Chief Executive of Fleet Mortgages, said: “Overall, the market has kicked off strongly at the start of 2017, and we’ve seen a considerable amount of demand. We’ve seen over the course of the last 12 months the increase in demand for limited company products, particularly when it comes to new purchases, however many landlord borrowers continue to hold their existing properties in their individual names and it’s therefore important that we continue to offer competitive products in this space.”
Fleet Mortgages has launched three new limited company buy-to-let products: an 80% loan-to-value (LTV) 2-year fix at 4.39% and two lifetime trackers at 4.2% to 75% LTV and 4% to 65% LTV.
For further information or to enquire about our developments, call our team on 020 8688 6552.