A study this week from Paragon Bank suggested that around a third of landlords who hold property in their own name plan to move it into a limited company structure in the next three years.
The research also revealed a healthy appetite among limited company landlords for expanding their portfolios, with a quarter looking to add a new property in the next year, compared with just four per cent of unincorporated landlords.
Brokers reported seeing a substantial increase in investor clients looking to hold property within a limited company structure, given financial benefits it can deliver, but emphasised the importance of being able to steer them towards adequate tax advice before doing so.
Focusing on gearing
Richard Campo, founder of Rose Capital Partners, said his firm had seen a “huge increase” in demand from landlords looking to buy via limited companies, noting that in his experience the higher the client’s income or asset background, the more benefit there seems to be from going down this path.
Campo noted that while pricing for these products is “often higher” than for traditional buy-to-let mortgages, this is offset by the fact that borrowers may be able to obtain higher sums.
He continued: “While it may be more work and can be more expensive, the effort is often worth the reward as most landlords will always aim to gear as much as possible.”
Stephen Perkins, managing director of Yellow Brick Mortgages, said that the lower stress testing involved means greater numbers of investor purchases were through limited companies.
He agreed that rates tend to be higher than on personal buy-to-let mortgages, but suggested that “margin is reducing as their popularity and market share increase”.
Operating on two paths
Perkins suggested that given the costs involved in moving personally-owned property into a limited company “most will just incorporate new properties to their portfolio and eventually replace the personally-owned ones”.
This was echoed by Luke Thompson, director of PAB Wealth Management, who said he hasn’t had any landlords move their portfolios into a limited company, instead opting to buy new properties in this way.
Making the sums add up
If landlords are not able to offset the mortgage interest against the rental income, then they may have properties actually costing them money every month, noted Rhys Schofield, brand director of Peak Mortgages and Protection.
He continued: “Fundamentally that is why so many people are shifting to owning through a limited company as it could be the only way to make a portfolio profitable.”
Bob Singh, founder of Chess Mortgages, added that demand for incorporation has been “huge”, pointing out that ever since wear and tear was removed as an allowance deduction “landlords have veered towards buying new properties under a limited company name”.
The lender choice
Campo noted that some lenders are “notoriously slow or can be unreliable” with these cases, so if they do end up representing the best value, it’s crucial to explain those risks to the client so that they can choose to press on or move to a more reliable option.
Other brokers pinpointed the likes of Paragon, Precise, TMW and The Mortgage Lender as being particularly good options for landlords looking to purchase through limited companies.
Thompson said it “would definitely be good to see more lenders enter this space”.
Get the tax right
Campo explained that the first thing discussed with clients when they are looking to buy a new investment property is whether they had tax advice.
“There is no point doing a load of research or getting agreements in principle until you know which path you are going down. Therefore we always recommend our clients get tax advice at the earliest opportunity as that is not an area we can advise on,” he added.
Tahina Akther, co-founder of Wildcat Law, emphasised the importance of getting proper advice if a client is considering moving their portfolio into a limited company.
“It is essential to get legal, tax and financial advice when looking at the structuring. We have seen examples of where one of these areas was not addressed resulting in issues for the property owner,” she added.
