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MoneyWeek article - the risks of incorporating a buy-to-let portfolio

Journalist: Marc Shoffman, Freelance

ended 15. January 2024

New figures from Hamptons show increasing numbers of landlords are setting up companies for a buy-to-let portfolio.

I am keen to get comments on the pros and cons of holding buy to lets through a company, particularly the extra mortgage costs that landlords may face.

Kind regards

Marc

7 responses from the Newspage community

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Editor
Samuel Mather-Holgate
Independent Financial Adviser at Mather and Murray Financial
Since the government stopped you from being able to offset mortgage interest as an expense, and only allows it as a basic rate credit, many landlords have started buying property as a limited company to circumvent this rule. As a limited company you can offset your interest payments and you only pay corporation tax on the net profit until you draw this out as a dividend. Landlords pay a steep premium through rates that are higher than personal buy to let mortgages. If you already own a property, you'll also have to pay stamp duty to move ownership into a company name. With a change of government likely this year, it is also unknown what changes will be made to corporation tax, dividend allowances and rates and even if residential properties can be commercially owned. It's not a great time to be a landlord.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
The key benefits of owning your portfolio under a limited company is being able to offset your mortgage interest against the rental income, and only pay tax on the profits. You can also decide to hold money in the company and decide when and how you draw money out to be tax efficient. Limited company ownership can also be useful when selling an entire portfolio as the company can be sold as opposed to all the individual properties.

Whilst mortgage rates are higher on limited company buy to let products than personal ones, the gap has been getting smaller as more landlords opt for incorporated model so these become more mainstream. Despite the higher rates, the stress-testing is usually lower allowing the Landlord to often borrow more on the same rental figure.

It’s certainly more important than ever for landlords to seek professional taxation advice to establish what is best for their unique personal circumstances.
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Aaron Strutt
Product and Communications Director at Trinity Financial
Many landlords feel they have been left with no option but to switch their buy-to-let properties into a limited company. This has led to an increase in the number of banks and building societies offering limited company mortgages to cater for the rising demand.
Many buy-to-let lenders have been improving their rates recently, and some deals have come down by over 1%. This has brought a bit more positivity back to the market. While rates have come down, some setup fees are shockingly high.
Many limited company buy-to-let products are only available to landlords who have set up Special Purpose Vehicles (SPVs), solely for purposes of purchasing, holding, or renting out property.
We strongly recommend our clients seek professional tax advice before starting the process or switching to a limited company, as it’s not necessarily the most tax-efficient option for everyone.
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Graham Cox
Director at Bridging Hub
SPV Limited companies have several benefits for portfolio landlords. Mortgage interest is tax-deductible against company profits, reducing corporation tax. Secondly, many lenders use a lower Interest Cover Ratio if your rental properties are held in an SPV, which means you can borrow more and potentially get access to a wider choice lenders. That said, Limited company mortgages tend to be slightly more expensive than individual purchases or refinance.
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Richard Jennings CeMAP
Founder & Managing Director at Richard Jennings Mortgage Services
Owning a buy-to-let property through a limited company can offer tax benefits, such as lower corporation tax rates and the ability to offset mortgage interest against rental income. Setting up a limited company is quick and simple, and it can limit personal financial exposure.

However, landlords may face higher mortgage costs when buying via a limited company. A reduced range of lenders available and a limited value of mortgage brokers who understand the additional complexities involved with managing a limited company portfolio for clients.

Additionally we always recommend liaising with a good accountant or tax specialist beforehand.
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Gary Bush
Financial Adviser at MortgageShop.com
Due to George Osborne's misguided changes to the tax rules that affected as a knock on smaller landlords in 2015 we have seen a progression to owners of these properties holding them within Limited Companies. Trading them in this way gains an advantage in accounting practices for these properties, albeit lending terms are slightly different but overall, taking any potential tax advantages into account, and even maybe suffering a marginally higher rate it does seem to work out cost-effectively. Any let property owners do need to seek advice from an accounting practice however as individual circumstances do need to be analysed, and related increased accounting costs explained, before registering Ltd companies.
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Jonathan Gordon
Director of Wealth Management at IP Global
Pros of holding buy-to-lets through a company:
Potential tax savings: Lower corporation tax rate than income tax for high earners.
Limited liability: Protects personal assets from business debts or lawsuits.
Easier portfolio management: Can hold & manage multiple properties under one entity.

Cons of holding buy-to-lets through a company:
Higher mortgage costs: Limited company buy-to-let mortgages often have higher interest rates and fees.
More complex setup & administration: Requires company formation, accounting, and tax compliance.
No capital gains tax allowance: Companies pay corporation tax on property sale, unlike individuals with an allowance.

The tax perks and liability shield come at the cost of pricier mortgages, admin burden, and no CGT allowance. More people using a company could indicate the tax benefits outweigh the higher mortgage rates or that people are more cautious and require the additional layer of financial protection.