Pro’s & Con’s of Limited Company Ownership
As we are all aware large numbers of property investors are moving to Ltd Company ownership.
However I still maintain that many are doing so needlessly and potentially incurring significant and unnecessary costs.
A couple of years ago less than 5% of our landlord clients opted for Ltd Co structures yet now it’s more like 60% and increasing every day.
While your accountant is invariably and correctly suggesting this route to save you tax I keep reiterating that they are not mortgage advisers and they and landlords aren’t sufficiently taking into account the increased mortgage costs.
We therefore encourage clients to obtain mortgage quotes based on buying in and out of a company and comparing this to the tax savings. Here’s one such example I’ve done today.
£150k purchase at 75% LTV
Own Name 5 year fix 2.28%
No lender arrangement fee
Free valuation
Total to Pay over 5 years £12,825
Ltd Co 5 year fix 3.39%
Lender arrangement fee £1125
£150 valuation
Total to pay over 5 years £19,869
So you have to ask your accountant if they can save you £7k over 5 years in tax. As a higher rate taxpayer if your mortgage was currently £350 a month on this property (an interest rate of approx. 3.75%) you would be paying an additional £832 in tax per year when the mortgage interest relief changes are fully implemented. That’s £4160 over 5 years.
If your mortgage was £220 a month however (a rate of approx. 2.25%) then you would be paying an additional £528 a year in tax or £2640 over the 5 years.
Does that additional £7k in mortgage costs look as attractive now?
We haven’t even looked at the extra tax in getting money out of the company, potentially increased accountancy costs for companies and loss of CGT relief.
Now there can be many other reasons to opt for a Ltd Co structure; estate planning without a doubt and also Ltd Co’s generally have a lower rental coverage requirement so for higher priced, lower yielding properties this may be the only way you can get a sufficient mortgage.
In addition if you are buying a HMO, multi unit, semi commercial property and the like the products are often the same in or out of a Ltd Co. However these reasons aside if the purpose is solely to get mortgage interest relief think twice.
The question to ask yourself is if it wasn’t for Section 24 would I be buying in a Ltd CO?
* Please note we are NOT accountants and do not offer tax advice, We can however provide you with advice about the likely cost implications of the mortgages for you chosen route of ownership. *
If you want more information please don’t hesitate to call me on 01625 548248 or click ask Richard HERE