Darren Amos buy to let financial adviserPublished by Darren Amos, Financial Adviser at Anstee & Co., Independent Financial Advisers. Looking at Buy to Let property and mortgages.

As you’d expect there isn’t a simple Yes or No!

Following the changes in taxation legislation announced by the chancellor, some of which are already in effect. There has been a lot of debate about landlords incorporating themselves as a Limited company. Of itself, this is actually quite a simple process, and can cost as little as £12 if you follow the instructions on the Companies House website.

Before you rush off to register your business there are several factors that you need to consider, some of which are positive, and some not so much so.

For a start, if you incorporate you’ll have to arrange new mortgages as a Limited company. Instead of as an individual. These are very likely to be at less favourable rates. Although this might be offset by their being fully tax deductible. As a business expense of course.

Is your Buy to Let mortgage adviser qualified?

You will also have to be sure that your mortgage adviser has the right knowledge and experience to source your mortgage as a Limited Company, and that they have access to any specialist lenders in this sector. You’ll also need to ensure that your accountant understands the Limited company Buy to Let market in order to take full advantage of any tax efficiencies that this may offer.

Before you can decide if it’s right for you, you’ll need to decide what it is you’re trying to achieve.

This might include:

  • Reducing the amount of personal tax that you pay
  • Perhaps you are looking to increase your portfolio
  • Will you be adding property development to your proposition?
  • Do you feel your current portfolio measures up?
  • Are the rentals all at the level you seek?

  • Are the mortgages effective?
  • What about your exit strategy?
  • Will you bequeath the portfolio upon your death, and if so will it be suitable to do so?

Incorporating as a Limited business might suit some of these options, and can definitely help to make your assets more tax efficient if set up correctly. This is particularly true in the case of inheritance tax (IHT). It is our strong recommendation that you seek appropriate specialist advice from a suitably qualified professional who can assist you with this area.

Are there good reasons to incorporate?

One of the main reasons to consider this option is that Companies only pay Corporation tax on their profits. This is currently 20% (2016/17 tax year), and is set to fall to 17% in the next few years. It is possible that it may fall even further (15% or even less perhaps) as a result of Brexit. These profits can be retained for reinvestment in a tax efficient manner.

Whilst tax relief for individuals on Buy to Let is restricted it is not the case for any refinancing to your portfolio within your Limited company wherein there is no cap whatsoever. It may also be possible to combine borrowings on several properties within one loan, thereby reducing the costs.

However, in the early days of your business, before profits are established, you are likely to be asked to provide a personal guarantee to the lender. You are also likely to have to pay higher interest rates.

It should be noted that borrowing through a Limited company may suffer from restrictions. These may not exist within your personal borrowing. This may result in difficulty in arranging further borrowing and can make it more difficult to dispose of individual properties, as the lender may not wish to allow this. Ultimately this can lead to difficulty in withdrawing funds from the business for your own benefit.

On the plus side

On the plus side as limited company Buy to Let is becoming more popular we are beginning to see more lenders coming into the market space, making borrowing easier and more cost effective.

As your company can continue long after your own demise, provided it remains solvent, it may benefit from Inheritance tax exemptions if set up correctly. This removes the necessity for complicated trust arrangements, which involve legal set up costs, may not be necessary.

Working within a Limited company offers a variety of options for on going tax planning. This may include restructuring mortgage lending and base costs in order to generate tax-free income.

It is also possible that your business may be able to make pension contributions into an appropriate pension scheme. On your behalf. This may further reduce the taxation upon your business, whilst transferring ownership of the utilised funds into your personal ownership in a tax efficient manner. In addition, due to recent legislative changes, a correctly set up pension scheme can help mitigate your own personal Inheritance tax liabilities.

There are even opportunities to purchase commercial properties within some pension schemes, which may allow you to further broaden the horizons of your portfolio. Before you begin to think about arranging pension provisions you should always seek expert professional advice from a fully qualified and authorised financial adviser. As there are both legal and taxation implications that must be considered.

The tax position re Buy to Let.

Assuming that you’ve decided that Incorporation is for you you’ll need to work closely with a specialist mortgage adviser. Preferably one who is independent and offers a Whole of Market approach to lenders. If you are buying more property, or perhaps remortgaging your existing portfolio to better terms or to raise capital. How you do things will have major implications. You may end up paying more personal tax, and the stamp duty you may have to pay on top of the mortgage costs etc. This could even impact on how much capital is available, restrict your borrowing power and may even affect the terms offered.

If you already have a portfolio of Buy to Let properties you’ll almost certainly be liable to pay Capital Gains Tax (CGT). At 18% or 28% (2016/17 tax year) depending on your earnings within the year. In addition as you are effectively selling the properties to the Limited company. The company will be subject to normal Stamp Duty Land tax (SDLT) at the prevailing rates. Also, the recently introduced additional SDLT levy of 3% that applies to all 2nd properties. Note that this additional levy can be avoided if portfolios are of sufficient size. The standard SDLT will still remain payable.

However, regulations do exist that may allow you to incorporate without giving rise to an immediate liability to the CGT or SDLT costs. In order to do this you must be able to prove your entitlement to something known as S162 relief. This effectively requires you to prove that you are already operating as a business, and merely incorporating as the next step. This would be similar to a small building partnership deciding to become a Limited company as it grows.

So how can you prove you are already a business to claim S162 relief? 

The most common test is to confirm whether a person acting as a professional landlord spends at least 20 hours per week running their ‘property’ business. You must be able to evidence this historically, as HMRC are likely to demand proof. Obviously it goes without saying that its best not to try to claim relief submit a claim until you know you can prove your entitlement.

As soon as you become a Director of your Limited business your income can be drawn as both salary & dividend, with your income taxed at your highest rate. It is possible that extracting proceeds from a property sale via a dividend could result in high earners potentially incurring income tax on the net dividend received. This could be up to 30.6%, giving an overall tax rate of over 50% (2016/17 tax year).

A particular tax trap to watch out for is where you might sell or transfer any of your shares in the company, making a profit from this. Even though tax has already been paid by the company on any gains it makes. You will be personally be liable to pay CGT in your own right. If the gain exceeds your annual allowances when added to any other gains made in the same tax year. This effectively means there is a potential for a double Capital Gains Tax (CGT) charge. Although other tax reliefs may be available to reduce the impact.

What if you choose not to go straight to a Limited Company?

The simplest option is to simply do nothing and stay as you are. If you are a basic rate taxpayer with relatively small loan to values the new rules are not likely to affect you. However, the usual IHT and CGT issues will still exist for you.

If that option doesn’t appeal then someone looking to retain their existing portfolio, or perhaps expand further, will still want to reduce the effects of the imminent reduction in mortgage interest relief. They will almost certainly be looking to minimise taxation by any legal means. Eventually pass their investment portfolio whilst avoiding if possible the inherent IHT liability. This may possibly be achieved by holding the investment properties either within-

  • A Personal Limited Liability Partnership (LLP)
  • Family Investment Company (FIC) hybrid.

Hybrid companies of this type tend to be less tightly controlled by HMRC. Because you are still effectively an individual there is no immediate need to re-mortgage or other incur other transactional costs. Of course you’ll still have the initial set up cost for the business, which you would have had to pay if you had chosen to Incorporate. As an individual you may well find it easier to raise finance and will be in control of how and when to take out your invested funds. This will allow you some control over the taxation of these funds too.

Choosing the most suitable option.

Before you can choose the most appropriate option for your own business you’ll need to have a clear idea as to which option suits your needs best. For that you need to properly understand your own situation. It is worth engaging the services of a good accountant at this point. As investing a small amount of money in their services could pay handsome dividends in the future in terms of reduced taxation.

We frequently hear of other “solutions” many of which are based upon legal counsel’s opinion. These are usually an untested interpretation of HMRC tax regulations that the legal counsel believes might work. We recommend that unless you are prepared to argue in Court with HMRC if they choose to challenge legal counsel opinion. You should be very wary of anything that isn’t proven, indemnified, or guaranteed. Just because these arrangements may have been used unchallenged by HMRC previously does not guarantee that they are legally sound. The HMRC might not challenge them in future. In many cases should they decide to do so they have a tendency to apply their decision retrospectively. So be warned!

The practical Buy to Let costs.

Whether considering fully incorporating, or one of the other options available. It will pay to seek advice from a specialist property accountant. It is usually the case that most general accountants don’t get involved with this kind of work. This means that they may not realise when it’s time to refer you to a specialist. Particularly if it means losing you as a client. As with most things, this uncertainty means that they’ll probably not look to give advice, just in case

The good news is that the cost of this specialist professional advice is tax deductible. With the bonus that some of the time spent would count towards your 20 hours. If you are claiming S162 relief!

Incorporation is not just a matter of creating a company. You’ll need to put in place uprated memorandum & articles, and a shareholders’ agreement may also be relevant. You will need to consider updating your Will to cover your personal estate and IHT planning, including arranging lasting powers of attorney for your property & financial affairs. You may want to consider a general one for the company. Of course all future costs are then borne by the company.

If you start off by forming a Limited Liability Partnership (LLP), you’ll also need a partnership agreement and supporting declarations of trust. Don’t forget, you’ll still have to bear any costs of mortgaging or re-mortgaging including all Broker & Lender fees. You’ll also bear all of your legal costs for conveyancing, rewriting or renegotiating tenancy and management agreements, and getting relicensed if necessary.

Creating the new company.

Creating a new company, whatever the format, is definitely not something that you should do yourself. You should engage the services of the following-

  •  a specialist property accountant,
  • experienced business legal adviser,
  • and an experienced independent financial adviser (IFA) who also offers mortgage advice.

You will expect to pay for their services, but any professional fees are tax deductible. Don’t forget to introduce them to each other, or ask one of them to refer you to someone they know. You’ll want them to work together on your behalf so they’ll all have to talk with each other. Otherwise you’ll never get to where you want to be.

How Anstee & Co help with your Buy to Let.

To arrange a meeting with Darren or one of our other financial advisers to look at Buy to Let’s, then please click here. We have offices in Kettering, Stamford and London. We make use of meeting rooms in Wellingborough, Towcester and Northampton. Our financial advisers cover Northamptonshire, Bedfordshire, Warwickshire and Lincolnshire.