Many landlords enter the buy to let market through the purchase of investment property or properties in their own name. Increasingly, however, landlords are looking to form limited liability companies to make those purchases and to transfer into those companies any existing buy to let investments they may own.
The growing interest in incorporation
Statistics about the growing interest in company ownership of buy to let property speak for themselves.
According to Mortgages for Business, for example, in the third quarter of 2016, more than 60% of all buy to let mortgage applications were made by limited companies – this represents a significant increase in the proportion of 20% of mortgage applications made in the previous 12 months or so.
The figure includes not only companies looking to buy new properties but also “transfers”, where private landlords are making sales of their property for the specific purpose of transferring them to a limited liability company they set up.
Why the interest in incorporation?
The answer, of course, lies in the changing economics of owning and operating a buy to let business:
Tax relief on mortgage interest
- the Residential Landlord’s Association (RLA) identifies one of the major reasons for transferring buy to let assets into a company arising from the loss of tax relief on mortgage interest paid by individual landlords;
- the changes come into effect from April 2017 and are being phased in for completion by 2020;
- companies, on the other hand, retain the ability to claim tax relief on any mortgage interest payments made;
Tax on profits
- depending on the tax band into which the individual landlord falls, it might be necessary to pay as much as 40% tax on profits from the buy to let business;
- companies, on the other hand, pay a flat rate corporation tax of just 20% - and this is due to be lowered still further within the next five years;
- nevertheless, Fylde Tax Accountants suggest that the expense and administrative inconvenience of setting up a limited liability company means that only landlords earning more than £5,000 a year and paying income tax at 40% are likely to consider company formation worth their while;
- a further incentive for incorporation is the ability of a limited liability company to escape the more rigorous “affordability” tests to be applied by mortgage lenders as a result of a change in the rules by the Prudential Regulation Authority (PRA) of the Bank of England;
- with effect from the 1st of January 2017, applications for mortgages made by individual private landlords have been subject to much stricter scrutiny and testing of the affordability of any buy to let mortgage;
- this is measured by the amount of rental income estimated to be earned, compared to the cost of monthly mortgage repayments;
- in future, applications for mortgages from individual buy to let investors are to be granted only where the estimated rental income if £140 a month for every £100 of mortgage borrowing;
- applications made by companies, on the other hand, escaped these tighter requirements, and they continue to qualify for a mortgage if estimated rental income is only £125 for every £100 borrowed.
Although there may be clear advantages in forming a company which invests in buy to let property – and the figures suggest that more and more landlords are doing so – it is important to remember that ownership of the property is in the hands of the company and no longer the individual landlord.
It remains to be seen whether the coming months see any further swing away from individual investment in buy to let property towards that by limited liability companies.