SLS In Focus: ‘Exciting opportunities’ in limited company BTL, but ‘proceed with caution’ – McCullough

As someone who has presented at recent roadshows on buy to let, I can confidently say that the industry is abuzz with excitement about the opportunities presented by limited company. However, as lenders and brokers, we are often met with a host of misconceptions and myths surrounding this option, so I wanted to bust these myths and show you the real benefits and considerations of this approach.. Though, it must be said, with a little caution.

First and foremost, the popularity of limited company buy-to-let has surged due to one main reason: tax changes. As most of us know, being a corporate landlord is more tax-efficient and profitable compared to being an individual (if of a high rate taxpayer status, that is). However, side-by-side with this popularity are some misconceptions that we need to address.

One common myth is that you can earn more income as a company landlord. Whilst it’s true that you can offset 100 per cent of the mortgage interest as tax relief, meaning greater profits, moving properties from an individual name to a company can be costly and may wipe out profit for years to come just to facilitate the transition.

For instance, if we take the average six per cent gross yielding property in England and Wales generating £12,000 in rental income, the average basic rate taxpaying limited company landlord will see their post-tax profit shrink from £4,490 to £1,780. For a higher rate taxpayer remortgaging at 60 per cent loan to value (LTV), five per cent rates will shrink their post-tax profit to just £120 each year after mortgage payments, maintenance costs, and tax.

Even more starkly, if rates rise above six per cent, they may not earn any profit and could end up in the red. So yes, you can earn more as a limited company but it’s entirely dependent on a range of circumstances.

Myths around stamp duty, incorporation and cost

Another myth is that you don’t have to pay stamp duty to move properties into a company structure. While some existing landlords can qualify for exemptions or reliefs, most landlords will not. They will be subject to full stamp duty liability upon buying units off their own name in a corporate structure. For example, if a high-rate taxpayer had four properties producing the £120 profit per year each noted above, and valued at £230,000 per unit, it could cost them over £10,000 to purchase each one in a limited company structure. This doesn’t even include capital gains or surcharges.

Let’s move onto a widely-debated topic, which is that adding children or grandchildren into the company and incorporating them into the portfolio business is easy. While many lenders are okay with minor shareholders being appointed into limited company structures, tax advice on this plan usually revolves around inheritance tax planning for the future. As long as children or grandchildren are named within companies but do not have any significant control (e.g., voting rights, majority shares, or directorships), then it’s usually okay. Again, it’s very circumstantial and must be fully researched.

Lastly, some people believe that moving properties into a company structure is not that expensive. However, for many people, it can be extremely costly whereas for a small few, it can cost dramatically less. While appropriate financial and tax advice should be sought, in simple terms, a significant benefit should always outweigh the significant cost. That may sound simple but it’s frightening how often I’ve seen company purchase cases fall over post-offer due to fees and costs, before being replaced with a personal remortgage instead. It’s essential to push clients toward sound tax advice before deciding on a limited company buy-to-let, to avoid the tax advice contradicting the desired mortgage journey.

In conclusion, the key here is to always encourage clients to seek tax advice before making any decisions. And if anyone ever approaches you with a buy-to-let enquiry and the customer is asking for it to be in a company name, always ask “why?”. It may sound appealing, but when you dig into the details, it may not be as fruitful as first thought.