Buy-to-let landlords looking to acquire properties via limited companies could well end up £1,000 per year worse off as a result of higher mortgage rates.
Research from Private Finance shows that a landlord with a limited company can expect to pay around 3.41% for a two-year fixed 75% LTV mortgage deal- in comparison to 1.92% for personal borrowers.
Limited Companies
A separate report released recently indicates that limited company lending actually exceeded borrowing from landlords during the second quarter of 2017.
This is unsurprising, as many landlords look to beat recent buy-to-let tax changes, including phasing out of mortgage interest tax relief.
However, Private Finance suggest that the high cost of mortgage borrowing for limited companies will outweigh possible tax advantages for landlords with portfolios of less than four properties.
The firm states that a landlord earning £46,010 over the course of the year will have £36,194 in take home cash if purchasing as an individual- after tax and mortgage costs are deducted.
If the same landlord was to purchase through a limited company, they would actually earn £34,825 in take home pay. This figure is £1,369, or 4%, less, due to the fact that limited company borrowers pay greater rates on mortgage borrowing, this reducing their net income.
Larger Lending
In addition, Private Finance said that repurchasing into a limited company structure could also prove costly for larger landlords.
A landlord with five rental properties, with earnings of £90,050 per year, would have £53,768 in take home pay, once tax and mortgage costs are deducted.
Should the same landlord choose to repurchase under a limited company structure, they would have £54,584 in take home pay. Once capital gains and stamp duty fees are taken into account they would be left with just £5,374.
If they were to spread these payments over ten years, their take home pay would be £49,663- over £4,000 less per year than if they were to operate as an individual.
Will limited company landlords with small portfolios be worse off?
Rates
Shaun Church, director of Private Finance, observed: ‘The option to invest through a limited company has come under the spotlight recently as landlords look for ways to offset recent tax changes. But landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.’[1]
‘Larger landlords might find the tax benefits associated with limited company ownership outweigh the higher cost of mortgage borrowing. Each investor is different and there’s no one-size-fits-all solution. Landlords should ensure they seek professional advice on how best to maximise their profits: an independent mortgage broker can help explain the range of options available to limited company and personal BTL borrowers,’ he added.[1]
[1] https://www.landlordtoday.co.uk/breaking-news/2017/6/landlords-with-limited-companies-may-earn-1-000-less-a-year