Buy to Let Mortgages for Limited Companies
From 2017, landlords can no longer deduct all of their finance costs from their property income to arrive at their property profits. As a result, many buy to let owners will see their tax bill increase heavily next year.
However, the changes in the mortgage interest tax relief are directed at private landlords and do not affect limited companies. Limited companies do not have to pay tax on their financial costs, as only their profits are affected.
In response to this, private landlords may want to set up limited companies to circumvent the new tax rules.
The Costs of Setting up a Limited Company
Although setting up a limited company may seem like an attractive option for private landlords, there are some associated costs that should be considered:
Capital gains tax: The HMRC treats a transfer of ownership as a sale of a property. This means that any private landlord that transfers a property to a limited company will have to pay 18% to 28% of the value of the property (depending on their tax code).
Stamp duty: When any property changes hands, whether through a transfer or a purchase, it is subject to stamp duty. Stamp duty land tax currently sits at 3% of the value of the property.
Additional fees: When ownership of the property changes, mortgage contracts need updating. This could come with additional costs such as valuation and legal fees.
Changes in 2017
From September 2017 further changes to the regulations around buy to let mortgages will be implemented, which will make it harder for borrowers to secure finance for their buy to let properties.
Review of the entire portfolio: Traditional lenders will have to look at a borrower’s entire property portfolio when deciding whether to grant a mortgage for a buy to let property.
There will be a requirement for the borrower to provide full disclosure of financial records detailing every buy to let property. This could affect the borrower’s application, particularly if some of the rentals are more profitable than others.
A stricter stress test: Lenders will have to review new mortgage applications to make sure the borrower can afford the repayments in the event that interest rates hit 5.5%. The new stress test is likely to introduce even stricter criteria, which will require borrowers to have a rental coverage ratio of at least 145% of the buy to let mortgage.
Next Steps …
The changes to the buy to let market mean that it is more important than ever for limited companies to secure the best mortgages for their properties. The financial services industry is complex and always evolving; unless you have an in depth knowledge of the market it may be difficult to know which mortgage is best for you. You may benefit from the assistance of a professional broker to find the most suitable mortgage to fit your needs. If you need a buy to let mortgage, it is advisable to contact a specialist property financial broker.