What is a buy-to-let limited company?

Major tax changes for buy-to-let landlords have been announced, and they’ll have an impact on a wide range of people involved in property and commercial property finance. Many landlords and owners of multiple properties will consider setting up a buy-to-let limited company to get around potentially painful new tax laws — in this article, we’ll take a look at why you might do this, and some of the key considerations if you’re thinking of doing so.

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What is a buy-to-let limited company?

Many business owners have considered, at one point or another, dipping their feet into the property market. The first question that usually pops up is whether you should buy the property in your name or through a limited company. Both options have pros and cons — and we’ll cover some of them in this article, along with other important considerations.

What is a limited company?

The first big decision you have to make as an entrepreneur is whether to start your business as a sole trader or establish your business as limited company. A limited company is a legal structure that draws a clear line between the legal obligations of the owners and the business itself. Any entrepreneur that wants to set up a limited company to trade in the UK will need to register at Companies House

Once incorporated, the limited company becomes a legal entity, thus the owners of that business cannot be held liable for any outstanding debt, and can only risk losing what they have invested in the company. In contrast, a sole trader can stand to lose everything. Hence, acquiring a buy-to-let property via a limited company makes sense given the tax benefits and availability of buy-to-let mortgages. And, importantly, if things don’t work out, you only lose what you put in.

What is a buy-to-let property?

In the last, the UK property market has offered a healthy return on investment, despite the cyclical nature of real estate. As a result, the sector continues to attract first-time buyers. When you purchase a buy-to-let property, you expect both an increase in the price of your property and rental income from tenants to cover your mortgage and maintenance costs.

Due to increasing costs, the net return (rent minus fees, maintenance, insurance etc) from investing in buy-to-let properties has decreased. It is doubtful whether capital appreciation will exceed the rate of inflation. Bear in mind that when you sell the property you will be subject to capital gains tax. This is distinct from inheritance tax, which is only payable when you inherit something of value. It is worth looking at a quick example of capital gains tax for a buy-to-let property.

Homes Ltd purchased a buy-to-let property for £700k and incurred £50k in legal/real estate fees, and a further £50k in home improvements. That year the owner and sole director of Homes Ltd, had personal income of £70k. Given that he never lived in the house when he sold the property in January 2022 he received £1m for it. But once the sale was agreed he became liable for £52k in capital gains tax, which equates to roughly 28%. In contrast, limited companies don’t need to pay capital gains tax, but instead, pay corporation tax at 19% (financial year beginning 1 April 2022.) So the lower tax bill for limited companies on selling a property might make it worthwhile, depending on your particular situation.

How to set up a buy-to-let limited company

If you are thinking of building a property portfolio, the first step is to set up a limited company by registering with Companies House. First, you will need to think of a name for your company and an address. Second, you will have to list the directors and shareholders — you will only need one director, which can be yourself. Next, you will need to list a business activity that is related to letting a property.

After the company has been created, you will then need to open a business bank account and then register to pay corporation tax. Keep all of these records like annual returns and confirmation statements, unless you have an accountant who can help you with tax returns and business expenses. It’s not difficult to establish a property company, but getting a buy-to-let mortgage can be challenging.

How to get a loan for a buy-to-let property?

If you are thinking of purchasing a buy-to-let property you will need to secure a commercial mortgage. On average, among high street lenders, you will need a 25-35% deposit for a commercial investment property. An aspiring private landlord, with a deposit of 40% plus will have access to the best deals available if the rest of the application is comprehensive. Commercial mortgage rates are usually higher than residential mortgage rates, as the risk posed to lenders is higher. And, because there are more residential lenders than commercial lenders, it’s more difficult to shop around. Consequently, commercial mortgage lenders often charge a premium.

How to choose the right commercial mortgage lender

High-street banks are the most obvious choice to secure a buy-to-let mortgage, but the eligibility criteria may be too stringent for many buyers. You will need to have a solid grasp of property development finance before you go down this road, as commercial mortgages can be complex for first-time investors.

This is often the reason why new buyers will turn to specialist lenders who can be accessed via lending platforms. The advantage of a lending platform is your specific needs will be matched with a lender who can offer the best rates and terms for the particular type of property you are looking to acquire. They will be able to find a lender that deals with higher-rate taxpayers or if you are already set up as a limited company. Always make sure that the lender you deal with is authorised and regulated by the financial conduct authority. If they are regulated by the financial conduct authority, you can have more peace of mind. Many scammers pretend to be legitimate firms. You can check if a lender is legit by entering their name or reference number on the FCA homepage.

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