Cheaper pricing and advantageous rental calculations are making limited company buy-to-lets an enticing prospect
Back in March, I highlighted the increasing interest in limited company buy-to-lets. I pointed out that the tax changes were encouraging more investors to consider buying property via limited companies.
Specialist lenders are increasing support for the limited company buy-to-let market. In March, the average rate – across lenders in the table below – was 4.1 per cent. The average rate across those lenders is now 3.7 per cent.
Whereas the rental calculation used by many mainstream residential buy-to-let lenders has moved up to typically 140-145 per cent at a notional rate of 5.5 per cent as a result of the pending PRA changes, the rental calculations on limited companies haven’t moved as lenders await the outcome of the consultation paper CP11/16. Limited company rental calculations are still typically 125 per cent at 5 per cent, making them advantageous for investors wanting to leverage their assets, as they will be able to borrow more via a limited company.
Back in March I noted that some lenders were no longer applying a pricing premium on limited company buy-to-let mortgages. Kent Reliance, Precise Mortgages, Interbay and Axis Bank are all now taking a similar approach. This trend is likely to continue.
The combined effect of cheaper pricing and more advantageous rental calculations are making limited company buy-to-lets a stronger proposition for landlords looking for ways to mitigate the more onerous tax regime.
The tax changes that are being phased in with effect from April 2017, and which will be fully in force by the beginning of the 2020/21 tax year, mean that individual landlords will only be able to claim back relief at the basic rate of 20 per cent rather than the higher tax rates of 40 per cent or 45 per cent. This may well mean that some higher-rate taxpayers find that profitable businesses start to return a loss.
One solution is for higher-rate taxpayers to hold their property portfolios in a limited company, taking them out of the personal tax regime and thus making them subject to corporation tax instead.
Doug Hall is director of 3mc