The research found that a borrower with a limited company could expect to pay 3.41% for a two-year fixed 75% loan-to-vale mortgage deal, compared to 1.92% for personal borrowers.
A growing number of landlords are opting to acquire property through a limited company as a means of combating recent buy-to-let tax changes, including the current phasing out of mortgage interest relief.
But according to Private Finance, the high cost of mortgage borrowing for a limited company will outweigh any tax advantages for landlords who have a portfolio of containing less than four properties.
It says that a landlord earning £46,010 annually (£35,000 base salary plus £11,010 in rental income – the average for a two bedroom house in the UK) will have £36,194 in take home income if purchasing as an individual, after tax and mortgage costs have been deducted.
But if the same landlord purchased through a limited company, they would earn £34,825 in take home income, which is £1,369 or 4% less, mainly because limited company borrowers pay higher rates on mortgage borrowing, which reduces net income.
Private Finance also suggests that repurchasing into a limited company structure could also prove too costly, even for larger landlords.
For landlords who already have a number of buy-to-let properties, one option is to repurchase into a limited company structure. However, this incurs two major tax bills: capital gains and stamp duty, making it an inadvisable move for landlords with a small number of properties who do not have much to gain from being in a limited company.
The calculations suggest even larger landlords could be better off remaining as personal investors. A landlord with five rental properties, earning £90,050 in total income (a £35,000 salary and £55,050 in rental income) would have £53,768 in take home pay once mortgage and tax costs are deducted when acting as an individual.
If the same landlord was to repurchase their homes under a limited company, they would have £54,584 in take home pay. However, once capital gains and stamp duty costs are taken into account they would be left with just £5,374. Spreading these one-off payments across ten years, take home pay would be £49,663: more than £4,000 less per year than operating as an individual.
Shaun Church, director of Private Finance, said: “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.
“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.”
https://www.landlordtoday.co.uk/breaking-news/2017/6/landlords-with-limited-companies-may-earn-1-000-less-a-year
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