Limited company buy to let

Posted by Simon Banks, April 13, 2022

Limited company buy to let

Purchasing property using limited company buy to let

Rents are growing at their fastest pace in 13 years and tenant demand is high. 

According to Zoopla’s latest rental market report, rents rose by 0.3% between October to December 2021. Meanwhile demand from renters rocketed by 76% in the New Year compared to the same period between 2018 to 2021.

Landlords or first-time property investors looking to take advantage of the buoyant market conditions should consider using a limited company buy to let mortgage.

A limited company buy to let mortgage works in a similar way to a standard buy to let mortgage. 

Instead of buying the investment property in your own name, however, you buy it using a limited company instead. 

Buy to let through limited company - how does it work?

If you’ve never used a limited company to purchase an investment property it can seem a little daunting. But it needn’t be.

First, set up a specific type of limited company called a special purpose vehicle (SPV). You can do this yourself or pay a fee for a company to do it for you. 

You can search for a property and make an offer before you’ve set up your SPV. You’ll need it up and running before you can apply for a mortgage.

It costs £12 to set one up and can be done online making the process quick. 

Once it is set up, you’ll receive what’s called a SIC code. This identifies your company as being suitable for buying and holding property and renting it out. The lender will ask to see this.

Now you’re ready to apply for mortgage finance.

Rates and rules

Loan to value restrictions and loan limits are the same for individuals as they are for limited company mortgages. At Molo we require a 20% deposit.

Limited company income coverage ratios (ICR) can be more generous than those used on personal buy-to-let mortgages. 

Limited company buy to let mortgages are assessed using an ICR of 125%. That means the rent received must cover the mortgage payment by 125%.

Personal buy to let mortgage ICRs are 125% for a basic rate taxpayer, 150% for a higher rate tax payer and 153% for landlords who fall into the additional rate tax band. 

Higher or additional rate taxpayers, therefore, would be offered a lower loan amount through a personal buy to let mortgage than a limited company product.

To find out how much you can borrow, use Molo’s limited company buy to let mortgage calculator.

There’s plenty of product choice for limited company landlords. As the mortgages have grown in popularity more lenders have introduced the option to their product range. 

In March 2021, 42% of the market catered to limited company landlords, according to data firm Moneyfacts. This has now increased to 47%. 

As competition has increased, rates have fallen. Limited company buy to let interest rates, however, are priced higher than standard buy to lets. 

Why use limited company buy to let?

Buying through a limited company buy to let mortgage has tax benefits for some investors.

In April 2017, the government began phasing out mortgage interest tax relief for landlords. The relief meant landlords could deduct mortgage interest from their rental income before calculating their profits for the taxman. This has now been replaced by a tax credit based on 20% of your mortgage interest payments. 

The 202/21 tax year is the first year that mortgage interest tax relief has been completely removed for private landlords. Limited company landlords, however, can still deduct 100% of their mortgage interest from their rent, reducing the profit on which their tax is calculated.

The government’s decision has increased the popularity of limited company mortgages among landlords. 

Using a limited company also means you pay corporation tax instead of income tax. Corporation tax is currently 19% and is set to rise to 25% from April 2023. If you are a higher or additional rate taxpayer, choosing to own your investment properties through an SPV could translate into a huge saving. 

Limited company buy to lets can also provide some shelter from inheritance tax because they are subject to Business Property Relief

Tax advice

It’s important to take tax advice before setting up an SPV. There are lots of tax perks to buying properties through a limited company. But not everyone benefits.

If you are basic rate taxpayer, the change to the mortgage interest tax relief will not affect you because you remain entitled to the 20% tax credit so seek professional advice first.

There’s also more administration required when using a limited company. You must file annual accounts, for example. 

Ask your accountant exactly what is required so know how much work is involved. You can always pay an accountant to do it for you if you are prepared to pay a fee. 

Rest assured you’re in good hands

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