Complex Buy To Let
What brokers should know about the rise in limited company lending
by: Adrian Moloney, sales director at Kent Reliance for Intermediaries
At the end of last month, when self-assessed tax returns for 2017/18 were filed, landlords will have noticed a larger bill than in previous years.
This is only set to continue until the mortgage tax relief disappears in 2020/21.
Research we conducted last year, in conjunction with BDRC Commercial (now BVA BDRC) allowed us to see the real impact of the tax changes among landlords.
We found that one in five had recently set up a limited company in order to offset the changes to the tax treatment of buy to let.
This has led to a rise in limited company lending as landlords look for options to reduce their tax bill.
A further survey we conducted with Charterhouse in late December 2018, found that 27% of landlords believed their profits will reduce going forward because of changes to the mortgage tax allowance.
What landlords and brokers need to know
Operating properties through a limited company structure has been seen as an efficient way for landlords to organise their finances. But they need to be aware of both the advantages and disadvantages.
From 6th April 2020, residential landlords will not be able to deduct the finance costs from property income when looking at taxable profit.
They will instead have to receive a basic rate reduction on finance costs from income tax liability.
However, this all works a little differently when a property is owned by a company.
Limited company costs
On the plus side, it will mean a landlord can still deduct the interest charges.
But it is important to remember a limited company will be liable for Corporation Tax on any profits, charged at 19% which is set to reduce to 17% in the tax year 2020/21.
Landlords will also need to take into account that when transferring to a corporate structure, this will be viewed as a sale or a purchase so they will have to pay capital gains tax as well as stamp duty.
Another aspect to be aware of is tax advice.
Independent professional advice is required when operating in a limited company structure, and detailed accounts must be submitted.
As such, additional fees of accountants and lawyers will need to be factored in.
With increased demand from landlords setting up a limited company, the market has responded by producing more options for brokers.
Good specialist lenders will also provide clients with limited company mortgages available for purchasing, re-mortgaging of buy to let, HMO properties, student accommodation and multiple units on one freehold.
No different to individual lending
With many more products on the market, brokers need to be aware of what is available to their clients.
Limited company lending tends to be a topic which is feared by brokers. However, there is no need to look at it any differently to lending to an individual.
The landlord will have meet the same level of transparency and provide the same information as they would if it were personal lending.
The underwriter will have to make the same checks but the differences will mainly be around confirming that the directors’ names match those on the company search. Usually, they accept up to four directors. Due diligence will need to be taken on any shareholders who are not listed as directors.
With professional landlords on the rise, demand to set up limited companies will also present a valuable opportunity for brokers.
It is essential that brokers are up to speed in this area, so that they can make the most of the market before demand goes.