Tax relief affects your decision on this. Since April 2020, mortgage interest attracts tax relief at the basic rate (currently 20%), even if you are a higher or additional rate tax payer. This means that whilst you may be paying tax at 40% on rental income, any mortgage interest relief is applied at the lower 20% rate.
Buying a property in your own name
You will pay more income tax if you are a higher or additional rate tax payer, or will become one once your rental income is accounted for. This will mean either reduced profit, or potentially a net loss after tax.
Buying a property via a limited company (special purpose vehicle or 'SPV')
This option can be more tax efficient for higher and additional rate tax payers. However, remember that being a limited company comes with other responsibilities. You will be a company director and need to abide by the Companies Act 2006. There are likely to be additional admin time and costs involved, and professional fees may be higher.
What does this mean for my mortgage?
The limited company market has grown significantly over the last 5 years with high street options and specialist lenders joining the market. Although the rates and fees are higher than taking a loan out in your personal name, this option could still present several benefits;
• Potential access to higher borrowing amounts if you’re a higher or additional rate tax payer
• Better net income position
• Support inheritance planning
• Retirement income
Which option should I choose?
Whether it ultimately works out cost effective for you depends on your income, mortgage rates, and fees, along with capital gains tax, inheritance tax and income from dividends.
A landlord survey commissioned by Paragon Bank in Q4 2024 showed that only 9% of landlords surveyed owned their properties through a limited company structure. For those with portfolios of four or more properties, this went up to 28%. 69% were planning to use the limited company route when next purchasing a BTL property.
There are different types of Limited Company structures that you can use to your benefit. Getting the right one can improve your lending options. We can help with this.
Many clients obtain advice from a tax specialist with expertise in advising landlords before deciding how to proceed and we can refer you to our carefully selected accountancy partner if you do not have your own arrangements in place.
TOP TIPS
Structuring it correctly the first time will likely save you a lot of money. For example, buying it in your personal name and then changing it into a Limited Company would be treated as a sale, and therefore you’d need to factor in Stamp Duty and Capital Gains taxes.
These aren’t your everyday options with your bank, so it’s best to seek advice from mortgage broker who has access to all the options plus the necessary experience working with buy-to-let mortgages. Book an appointment today to talk to one of our advisers.
