Limited company landlords face higher mortgage costs, so may not end up paying less in a bid to beat mortgage interest tax relief changes, warns broker Private Finance.
Lenders such as OneSavings Bank have reported increasing buy-to-let applications from limited companies, but research by Private Finance shows that any savings made by keeping mortgage interest tax relief may be exceeded by the higher costs of a mortgage deal for a limited company.
A limited company borrower can expect to pay 3.41% for a two-year fixed rate 75% loan-to-value (LTV) mortgage, compared with 1.91% for personal borrowers.
Analysis by the broker found that only landlords with multiple properties benefit from a limited company structure, with four properties being the tipping point.
Landlords looking to repurchase existing properties into a limited company are also likely to lose out, as this move triggers costly Capital Gains Tax (CGT) and Stamp Duty.
The research took a base salary of £35,000 and the average UK rental income of £11,010 from Zoopla to see what a landlord would owe on an average property worth £192,045.
Based on this scenario, a 75% LTV mortgage at 1.92% would cost a personal borrower £2,765 per year, while a limited company, at 3.41%, would pay £4,912.
The figures below show how savings are only made once tax relief can be claimed across four or more properties:
Gross income (salary + rental income): £57,020
Annual mortgage interest costs: £5,531
Total tax bill: £10,902
Net income: £40,587
Gross income: £68,030
Annual mortgage interest costs: £8,296
Total tax bill: £14,753
Net income: £44,981
Gross income: £79,040
Annual mortgage interest costs: £11,062
Total tax bill: £18,604
Net income: £49,374
The Director of Private Finance, Shaun Church, says: “The option to invest through a limited company has come under the spotlight recently, as landlords look for ways to offset recent tax changes.
“But landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.”
He suggests: “Larger landlords might find the tax benefits associated with limited company ownership outweigh the higher cost of mortgage borrowing. Each investor is different and there’s no one-size-fits-all solution.”
Nevertheless, the latest study by Mortgages for Business shows that limited companies accounted for 77%of all applications for buy-to-let finance in the first quarter of 2017 and 78% in the second.