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Buy-to-Let Property Investments: What First-Time Landlords Need to Know

Established and aspiring landlords alike continue to question the potential benefits of purchasing BTL properties via a limited company. Understandable, given the government’s no-holds-barred approach to BTL legislation over recent years.

Landlords were first hit (and hard) back in 2016, when the government introduced a new 3% stamp duty level on BTL property purchases. Next, policy reforms slashed mortgage and loan interest relief on second homes, which would eventually be removed entirely by 2021.

2019 brought more bad news for landlords in the form of the Tenants Fees Act, imposing much greater restrictions on what tenants could and couldn’t be charged for by property owners.

Whichever way you look at it, turning a profit as a private landlord is becoming trickier all the time. But as demand for quality rental homes skyrockets and average monthly rents break every record in the books, there’s still good money to be made with savvy BTL investments.

In total, the value of the UK’s BTL sector has grown from £239 billion in 2017 to more than £1.7 trillion today.

“There have been many challenges that have subdued investment into the private rented sector over the past few years,” comments Stephen Clark of Finbri bridging finance broker 

“But the sector has proved resilient and we have seen continued demand for finance in this vibrant part of the economy.”

Safety and Stability

UK’s property market, in general, remains a relative safe haven for investors. Even the catastrophic events of the past two years have done nothing to quell the public’s appetite for quality homes in desirable locations.

In fact, figures from the Nationwide suggest that from March 2020 to December 2021, average house prices in the UK grew by more than 16%.

Responding to demand from homebuyers and investors alike, major banks have been diversifying their mortgage portfolios as of late. BTL mortgage products, in particular, are available in abundance – more than 2,235 specialist mortgages at the end of last year.

What’s more, many banks have also been cutting interest rates on five-year fixed mortgages for BTL borrowers, as means to encourage more landlords to make their moves.

“The BTL sector has faced its share of upheaval and changes to regulations and requirements, so it is highly encouraging to see that providers are still keen to attract first-time landlords,” said Eleanor Williams at Moneyfacts.

“Rents have risen at the fastest rate on record, while tenant demand has almost doubled.”

Still, with inevitable Bank of England base rate hikes on the cards, mortgages across the board are not going to get any cheaper than they are now.

But when it comes to maximising profits and minimising tax liability on a BTL property, is it better to purchase homes through a limited company?

The Pros and Cons of Limited Company Investments

Forming a limited company to purchase real estate is not something that should be done without careful forethought. In addition, the advice and input of an experienced broker could prove invaluable.

From a general perspective, the benefits of using a limited company to purchase a BTL property are as follows:

  • All profits generated on limited company BTL property purchases are subject to flat-rate corporation tax at 19%. By contrast, private landlords are subject to standard income tax bands – 20% in the normal band and up to 45% for higher-rate taxpayers.
  • Mortgage interest is classed as a business expense for limited companies, meaning it is tax-deductible. For private landlords, a tax credit of just 20% can be claimed on mortgage interest payments.
  • Revenue withdrawal options are also broader.  All profits received by private landlords are taxed, whereas profits taken out of limited companies are only taxed once.
  • There are also options for decreasing overall tax liability, such as forming a family investment firm or a limited liability partnership. Assets can also be transferred to family members to avoid or reduce inheritance tax.

Downsides also apply with limited company BTL investments, including the following drawbacks:

  • Mortgage options are much more limited for businesses looking to purchase BTL properties, and it can be more difficult to qualify.
  • Larger deposits are the norm for these kinds of property investments, along with higher rates of interest and elevated borrowing costs.
  • Along with corporation tax, dividends withdrawn from the company are also taxable.
  • In order to transfer a property you already own into a company holding, it needs to be sold in the normal way. This means paying stamp duty at the normal rate, along with all associated conveyancing and legal fees, plus Capital Gains Tax.

Despite this fairly even split of pros and cons, more landlords are purchasing properties through limited companies than ever before. In fact, the figures suggest that around 80% of all BTL mortgages are being issued to limited companies.

“Getting the ownership structure right might make a tremendous difference in the amount of tax you pay throughout your lifetime,” commented Rob Dix (the Property Geek).

As a general rule of thumb, experts advise considering forming a limited company where a landlord has a minimum of three private rental properties. By contrast, landlords with two properties or a single rental home may find it more cost-effective to simply hire an accountant to oversee their affairs.

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