Limited Company Buy To Let

Why is limited company buy-to-let so popular?

Buying through a limited company is now a common strategy for investors looking to maximise their returns in property.

Half of new buy-to-let mortgages were taken out by landlords via a company in 2021, while the number of new buy-to-let companies formed rose by 14% compared to 2020, Hampton’s analysis of Companies House data shows.

So why has limited company buy-to-let steadily grown more popular?

Tax changes

The primary reason is to avoid punitive tax measures which hit individual landlords in the pocket, as the government gradually removed mortgage income tax relief between 2017 and 2020.

Before 2017 investors operating as individuals could deduct their mortgage interest costs from their rental income when declaring profits to the HMRC.

Today, however, landlords operating as individuals only receive a reduction on their final tax bill of up to 20% of mortgage interest costs.

In effect, this means investors are being taxed on profits they’re not making because mortgage interest costs are mostly disregarded.

Mortgage rates

While the situation is improving, the mortgage industry is lagging behind on servicing limited company landlords. Around a quarter of the UK, mortgages are available to landlords via a limited company, and interest rates are higher due to this lack of competition.

Some lenders also charge more for limited company buy-to-let products than for individuals.

This is a situation that may improve in the years ahead because it doesn’t really make much sense – a company landlord who treats this as a business is probably safer than an accidental landlord who only owns one property.

The one upside of getting a mortgage as a limited company is you’re usually able to borrow more with the same level of tenant income. This is great for landlords looking to purchase in lower yielding areas enabling landlords to still put down a 20 or 25% deposit rather than needing to increase.

Conclusion

If you’re a new landlord, accountants tend to recommend using a limited company only when being a higher rate taxpayer and when there isn’t an immediate need to use to remove the earned income from the company.

The advantages are clearly greater if you are a higher-income taxpayer and/or own multiple properties.

An accountant will properly evaluate your situation and make a recommendation on how best to purchase your buy to let property.