Many people have chosen to invest their hard-earned money into the real estate market either as an individual or as a company. However, the tax rules have changed, and the latest tax laws are applicable from this financial year. So, people are on the fence about how to go about purchasing properties for investment purposes.
This article will help you understand whether you should purchase a buy-to-let property through personal investments or a limited company mortgage.
Investing in a buy to let property through an LLC
In comparison to investing as an individual trader, investing in real estate through a limited company may or may not give you an advantage. Therefore, it is vital to take the administrative implications into account and seek expert guidance.
Another choice for employing a limited business to handle just property ownership is to set up a Special Purpose Vehicle (SPV). In the end, the choice should be made in light of each person’s unique situation.
Advantages and disadvantages of investing in a buy to let company through an LLC
Here are the advantages and disadvantages of investing in a buy to let property through an LLC:
Advantages of investing in a buy to let property through an LLC
Simple and quick setup
Organising a buy-to-let firm is much easier than you would imagine. You may get everything up and running in about 15 minutes with the help of online setup options. However, keep in mind that this is a significant choice. Therefore, before going through with the setup, we advise you to get expert counsel from a lawyer or accountant.
Future planning is relatively simple
Comparatively speaking, transferring ownership of a limited corporation is significantly easier than doing so for individually owned assets. If you want to transfer your firm to family members, doing this can also help to shield your transaction from taxes such as capital gains, inheritance, and stamp duty.
Faster portfolio expansion
Profits kept inside your business can reduce your tax obligations and hasten the growth of your real estate holdings. When selling buy-to-lets, you can avoid generating capital gains if you reinvest profits back into your company. Because of this, you may invest more of your income in growing your portfolio more quickly and seizing new investment possibilities.
Limited Liability Company
When it comes to buy-to-let investments, having a limited liability company can provide important security. You are not personally responsible for any obligations incurred by this firm, including debts related to buy-to-let properties, as the owner. However, it is crucial to keep in mind that your mortgage lender may still want personal guarantees from you.
Disadvantages of investing in a buy to let property through an LLC
Limited mortgage product options and higher interest rates
Using a limited company structure for buy-to-let properties may limit your mortgage product alternatives, perhaps resulting in higher interest rates. This is so that lenders do not consider limited businesses to be as risky as individual landlords.
Corporation tax on trading profits
You must pay corporation tax on any gains if you operate your buy-to-let business as a limited company. Currently, the corporate tax rate is at 19%. As a result, you might not have as much money in your pocket as you would have if you had chosen a different structure.
Stamp duty on real estate transactions
When you transfer or sell your properties to a limited company, you will need to pay stamp duty. This might add a substantial upfront cost.
LLC mortgage rates
If you are seeking to obtain a buy to let mortgage through a limited company, you should expect to pay higher rates than if you were applying as an individual landlord. To ensure that you get the best rates possible, it is recommended to compare limited company buy to let mortgages through your accountant. Here are the top limited company buy to let mortgage rates available along with their terms and fees:
- Vernon Building Society, with a maximum LTV of 70% and an initial rate of 2.5% for 36 months. They also offer a maximum LTV of 75% with an initial rate of 3.05% for 36 months.
- Newbury Building Society, with a maximum LTV of 75% and an initial rate of 2.65% for 36 months.
- Molo, with a maximum LTV of 75% and an initial rate of 3% fixed for 24 months.
Investing in a buy to let property as an individual
Formerly, purchasing a buy to let property as an individual was easy. It is now less cost-effective due to tax relief changes, and basic rate taxpayers are being forced into a higher tax band because they can no longer deduct interest from their income.
The last stage in eliminating tax assistance on mortgage interest payments was included in this year’s budget, and interest would now be claimed through tax credits. As a result, when making an individual investment in a buy to let property, it is crucial to take tax changes into account.
Advantages of investing in a buy to let property as an individual
Advantages of investing in a buy to let property as an individual include:
- Greater personal liability and choice in mortgage products
- Lower mortgage interest rates and no corporation tax to pay
- Stamp duty on properties priced up to 500k is on hold this year, which could save around £4,500 on the average purchase
- Easy-to-manage accounts since it is not done for a company
- Easier access to your money
Do note, if purchasing additional homes, including buy to let properties, a 3% surcharge may apply on homes up to 500k.
Transfer personal property to an LLC
To save on taxes, landlords are transferring ownership of their personal buy-to-let properties to limited companies. However, this procedure requires a sale and repurchase transaction and is more complicated than simply changing the owner’s name.
This incurs costs, including capital gains tax, stamp duty, legal fees, mortgage costs, and valuation charges. A limited business must file annual accounts and returns, among other legal paperwork, so it is crucial to keep this in mind as well.
Despite these expenses, it might be more affordable to transfer property ownership to a limited company because all costs, including mortgage broker fees, can be claimed as costs before taxes are calculated.
How can we help you?
We at dns accountants are committed to assisting people in buying real estate, particularly landlords who might require assistance. We can offer unbiased advice and help to ensure that you make judgements about financing alternatives that are well-informed thanks to our experienced professionals and whole market approach.
In order to guarantee that you receive a comprehensive service from the application process to ownership, we have also established solid agreements with reliable specialists, such as insurers and solicitors. Our ultimate goal is to assist people in protecting their money and growing their portfolios. We are available to assist you if you need help buying real estate. To learn how we can help you, please contact us right away.
Frequently Asked Questions – FAQs
What are the benefits of purchasing a buy-to-let property through a limited company mortgage?
Purchasing a buy-to-let property through a limited company mortgage can offer tax advantages, limited liability, and potential financial protection for your personal assets.
What are the advantages of using personal investments to buy a buy-to-let property?
Using personal investments to buy a buy-to-let property can provide more flexibility in terms of mortgage options and may result in simpler tax reporting compared to owning the property through a limited company.
Are there specific eligibility requirements for obtaining a limited company mortgage for a buy-to-let property?
Yes, lenders typically have specific eligibility requirements for limited company buy-to-let mortgages, including the trading history of the company, the creditworthiness of the company, and the property’s rental income potential.
What are the tax implications of purchasing a buy-to-let property through a limited company mortgage?
The tax implications of purchasing a buy-to-let property through a limited company mortgage can include corporation tax on rental income and potential tax benefits related to mortgage interest payments.
How does financing a buy-to-let property through personal investments differ from using a limited company mortgage?
Financing a buy-to-let property through personal investments involves using personal funds or traditional residential mortgages, while a limited company mortgage involves using the company’s funds and structure to purchase and manage the property.
What are the long-term considerations when deciding between a limited company mortgage and personal investment for a buy-to-let property?
Long-term considerations include potential changes in tax laws, personal financial goals, and the overall financial strategy of the investor or company. It’s important to seek professional advice to make an informed decision.