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Buy-to-let investors who acquire properties via a limited company could be £1,000 a year worse off due to higher mortgage rates, fresh analysis from Private Finance shows.
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.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. 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.Full/source article - Landlord Today SEE ALSO - The BIG tax issue: Should I incorporate?UP NEXT - Expert says "Pay NO tax" - thread deletionDON'T MISS - Change in landlord behaviour re: Ltd Co'sNOW WATCH:
You need to have a better reason to form a co other than S24
Its not for every one and anyone running property via a company has to see the pros and the cons
Succession is one of my main reasons an Pension Planning
I have to retire one day and off loading now is best for me as I don't want to sell what I have and I am using the Company to avoid IHT
Taking income from a Company is more costly due to tax and NI implications
Accountancy charges are much higher too
So I agree with this article 100%
Learn Change and Adapt ?????
"Buy-to-let investors who acquire properties via a limited company COULD BE £1,000 a year worse off due to higher mortgage rates"
"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 "
To put this into context, I can get a 5 year fixed rate, through a ltd company, for a better rate than the one quoted for a 2 year rate. Precise Mortgages, for example, offer a 5 years fixed for 3.39%. I've also secured borrowing very recently with Paragon, SBI and Landbay with rates of between 3.59% and 3.65%.
I accept that Ltd Co borrowing will always be higher than borrowing in a personal name, but nowhere near the quoted rates. I guess it just highlights that by using a good broker who is whole of market, then you can get access to decent rates.
I am curious if there are any investors out there who actually have a 2 year rate for 3.41% or higher, and if so, what made you go with such a higher rate?
lol never let facts get in the way of a good story
I have found Precise Good and I am not paying much over the odds on interest either
I know If I had not reorganised my business I would have paid around 80% Tax
so I am happy to have a company thank you
This is something you should discuss with an accountant and not base on generic case studies.
The gap may not be as high as the article suggests as LTD Company BTL Rates are down at 2.89% (not 3.41%).
In addition when they say "once capital gains and stamp duty costs are taken into account" - well that's buying properties off yourself. That is expensive! There is no like-for-like comparison.
Plus we seem to be comparing a higher rate taxpayer to a higher rate taxpayer - as we know the main issue is the "removal of mortgage interest relief" is that it will drag people up tax bands.Your lower rate taxpayers becoming higher rate tax payers - paying 20% up to paying 40% or 45%.
Just a few things, i noticed without running the numbers.
Private Finance is right though that rates are lower in personal than Limited Company Buy to Let.They are comparing - Virgin, Accord, Santander and TMW (vanilla mainstream lenders) with Foundation, Paragon, Precise and Kent Reliance (specialist lenders).
Your mainstream lenders are yet to enter the LTD Company Market but as they see there market share shrinking they certainly will, especially when they compare returns of themselves to that of there higher rate competitors.
It is more than just Tax Benefits in using a LTD Company but better Stress Tests and ability to control your "take home income" by utaliseing retained profits in a company to name a few.Its always good to highlight the issue but it is wrong to make such blanket statements. The only correct statement when it comes to removal of mortgage interest releif and why landlords may choose to go to a Limited Company - is to talk to your accountant. Its not just what your income is like today either, its what it will look like in a few years.
Looking for the Best BTL Mortgage? Call the Specialist Team at Bespoke Finance. The above is not financial advice, its me rambling - just passing time on a coffee break.
Ncooper is right, the devil is in the detail, and it's not simple. However that point cuts both ways, the detail of Incorporation doesn't always come out as the appropriate course of action.
Their figures are dubious (because take home income of £36194 with a pretax salary of £35k assumes BTL take home profit after mortgage expense AND tax of £9113 (because take home pay - assuming no pension contributions, childcare vouchers, student loans etc - from £35k salary is £27081 this year)). I don't know how this is mathematically possible, because the difference between £11010 (income) and £9113 (profit after tax + interest) is less than 20% of even the full £11010.
But even if correct, their conclusion would only be true for landlords whose salary income is low (e.g. 35k), and those who take all rental profits out of the company by way of dividends.
As soon as you start saving some of the rental income inside the ltd co (e.g. to reinvest or to build up a buffer for repairs etc) or earning a decent salary this becomes less true - or even complete bollocks in some cases (when your S24 BTL "profits" put you in the 100k+ bracket). Example:
Income after PAYE: £42.6k
BTL income: 11010
Mortgage interest (assume 180k house with 60% LTV mortgage at 1.92%): 2070
pre-S24 profit after tax: 5362
after-S24 profit after tax: 4948
Total income after tax: 47548 (personal)
Within a ltd co :
BTL income: 11010;
Mortgage interest (assuming same property and mortgage size, at 3.41%): 3683
Corp tax: 1465
Distributable profit (all taken by dividend): 5861
Dividend tax: 280
Dividend after tax: 5581
Total income after all tax: 48,181
It gets MUCH worse if you're on around 100k: total money in your pocket after tax:
* BTL in personal name = £68,526;
* BTL in company: £71,362
and like in the original article, all non-mortgage costs are in both cases assumed to be zero.
I guess that they assume some pension contribution otherwise the tax would be higher.
My salary is even lower (zero) but I initially plan to take all the money out by way of a directors pension. After I start drawing on that pension I was still be able to contribute some that way. As a pension it is effectively tax free going in, and will be 25% tax free coming out (after growing). If the limit is reduced to £4k after you start drawing as was proposed that will limit what I can take that way.