Limited company buy-to-let mortgages offer tax benefits and can be a great option for individuals who fall into the higher tax brackets to make the most of their finances.
What is a limited company buy-to-let mortgage?
A limited company buy-to-let mortgage is one taken out by a limited company as opposed to an individual, in order to purchase a rental property.
This is usually done to separate business and personal assets as well as giving tax advantages, because profits will be taxed under corporate regulations, where individual landlords cannot claim mortgage interest as a business expense.
When limited company buy-to-let mortgages are suitable
Limited company buy-to-let mortgages are primarily suitable for people who fall into higher-rate tax brackets, individuals with large portfolios, or those who are simply seeking for better tax efficiency.
Limited company buy-to-let mortgages also make it easier to buy, sell and manage properties when there are multiple people involved. This means they are ideal for certain partnerships.
How limited company buy-to-let mortgages work
Limited company buy-to-let mortgages work by enabling a limited company (usually a ‘special purpose vehicle’ or ‘SPV’) to take out a mortgage or remortgage and existing property:
- Set-up structure – You’d typically set up a limited company (SPV) to own the property. This company will be on the mortgage and title deed.
- Lender assessment – Lenders often require rental income to be 125% of the mortgage interest payments. The finances of the director or shareholders of the limited company may also be assessed.
- Application – Similar to a buy-to-let mortgage application, except the official applicant is the limited company.
- Tax benefits – Rental income will be taxed as company profit, which can be at a lower rate than standard income tax for high-rate taxpayers.
How much deposit do you need for a buy-to-let mortgage through a limited company?
For a buy-to-let mortgage through a limited company, you usually need at least a 25% deposit. However, this is dependent on the lender and the individual company, and values can vary from 15% to over 30%.
The rate of the deposit may also vary based on the property type, borrowing amount, and personal financial situation, or that of the limited company.
Are rates different for limited company buy-to-let mortgages?
Interest rates are generally higher for buy-to-let mortgages than they are for standard mortgage types. This is because it’s considered a higher-risk mortgage type for lenders, with many lenders not even offering them.
The narrower range of lenders offering limited company buy-to-let mortgages leads to lower market competition, and subsequently higher rates.
Also, deposits are usually higher for limited company buy-to-let mortgages too. As a result, it’s important to properly assess your finances and those of your limited company before proceeding with seeking a buy-to-let mortgage.
Costs involved in limited company buy-to-let mortgages
The following one-off costs are involved in limited company buy-to-let mortgages:
- Deposit
- Stamp duty land tax
- Mortgage application fee
- Valuation fee
- Mortgage arrangement fee
- Legal/conveyancing fees
These are the ongoing or operational costs you need to consider:
- Corporation tax
- Mortgage interest
- Administrative costs
- Letting agent fees
Before you proceed with your limited company buy-to-let mortgage, it’s vital that you assess your financial situation and determine that this mortgage type is definitely suitable for you.
One way to establish this, is to consult a financial advisor such as the team at Barlow Irvin, who can help you to understand the best possible course of action and mortgage type.