There is no doubt that limited company lending accounts for a far larger share of the buy-to-let sector than it did five years ago.
It started from a pretty low base.
But this niche sector of the mortgage market gets more than its fair share of the buy-to-let conversation. If you follow the trade press and read the national newspapers you could be forgiven for thinking that taking a mortgage under a limited company structure is now the default option for landlords.
The impression often given is that this is the preferred route taken by landlords – a no-brainer option for those who want to reduce their tax bill.
But that’s the problem.
Limited company buy-to-let really isn’t a no-brainer. It can be costly, complicated and it doesn’t always offer the tax advantages that are so often espoused.
That’s why independent tax advisers, not brokers or lenders, should always be the ones to advise landlords of their options.
Benefits for all?
For some landlords there are substantial benefits to incorporating. Higher and additional rate tax payers may find significant tax efficiencies by purchasing a property through a limited company structure, not least because they get to offset their finance costs as an expense against corporation tax.
For the majority of landlords who hold property on a personal basis, the restriction of finance cost relief for landlords means this won’t be an option by 2021. This widely criticised tax measure has been a catalyst for some landlords to set up a limited company (SPV) over the last few years.
However, many landlords are not, and will not be, adversely impacted by the withdrawal of tax relief.
A 20% tax benefit means that many basic rate taxpayers (bar those on the cusp of the higher rate threshold) will find their tax bills unchanged under the new system. The government’s own impact study found that only one in five landlords would pay more tax when the new system is completely phased in.
No landlord should rush down the limited company route without understanding the tax and other cost implications of doing so. And, for that, they need individual tax advice.
How prolific is it?
Some headlines will also give you the impression that limited company lending dominates the buy-to-let sector.
But remember that many surveys have small sample sizes – they are not the same as industry-wide statistics and UK Finance, which collates gross mortgage lending, including buy-to-let data, doesn’t publish a breakdown of the share of limited company and individual lending.
We should also be cautious of survey data drawn from the customer base of specialist buy-to-let businesses, because those borrowers may not be representative of all landlords. Borrowers using a specialist buy-to-let broker for example, are more likely to be professional limited company landlords – so the results may be skewed.
In fact, 45% of landlords have just one rental property, according to the government’s English Private Landlord Survey
(with a significant sample size of 8,000).
Many of these will be accidental landlords, and many will hold mortgages with high street banks on a personal basis.
The same survey also found that an overwhelming majority of landlords operate as individuals not limited companies – 94% of landlords rent property as an individual, 4% as part of a company and 2% as part of some other organisation.
Of course, large-scale landlords account for a huge swathe of the private rented sector (17% of landlords with five or more properties control 48% of the PRS), so the proportion of overall properties rented by landlords under a limited company structure will be higher.
But the fact remains, most landlords are not choosing the limited company route.
What about the mortgages?
Some lenders now offer the same product range on a limited company or individual basis, but this doesn’t necessarily lead to parity in rates.
According to Moneyfacts, the average fixed buy-to-let mortgage rate on offer to landlords individually is 3.02%, compared to an average 4.14% for limited company mortgages.
There’s also far more choice available to individual landlords – 1,729 fixed rate deals, compared to just 354 available on a limited company basis (1/5/19).
It’s true that limited company mortgage lending has grown and the lending community has responded to the demand. It’s clearly gaining ground in the portfolio landlord purchase market.
But brokers shouldn’t feel a need to suggest your landlord clients go down the route of incorporating.
The mortgage choice is limited compared to traditional buy to let, rates can be higher and limited company status may, or may not, result in a reduced tax bill. As always, landlords should get professional tax advice.
But there is good news – the majority of landlord clients taking out a buy-to-let mortgage, whether on an individual basis or not, can access a huge range of innovative, transparent and competitive products from a wide range of lenders.
And, as a broker, you can help them find the right solution for their needs.
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