Limited company buy-to-let mortgages explained

A limited company buy-to-let mortgage is lending to a company that owns the property, rather than to you personally. Most landlords use a special purpose vehicle set up only to hold property. The main attraction is tax: companies can still deduct mortgage interest from profit, while individual landlords only get a basic-rate tax credit. The trade-offs are higher rates and fees, a personal guarantee, running costs and a real tax bill if you move an existing property in.

Since April 2020, individual landlords cannot deduct mortgage interest from rental profit. Instead they receive a tax credit worth 20 per cent of the interest, and the full rental income counts towards their total income. For a higher-rate taxpayer with a geared portfolio, that changed the arithmetic significantly. Companies were left outside the restriction, so finance costs remain a deductible expense against company profit.

That does not make companies automatically better. It makes them better in some situations, mainly where you are a higher-rate taxpayer, gearing is meaningful, and you intend to keep profits inside the company to buy more property rather than draw them out.

Lenders strongly prefer a special purpose vehicle: a company incorporated to hold and let property and nothing else. Trading companies with other activities face a much shorter lender list and more underwriting.

Two practical points at incorporation:

• SIC codes. Most lenders want to see property SIC codes on the Companies House record, typically 68209 for other letting and operating of own or leased real estate, and sometimes 68100 for buying and selling own real estate. Getting this wrong is easy to fix but delays applications, so set it correctly at incorporation.
• Directors and shareholders. Lenders will want every director and usually every significant shareholder to be a party to the application, credit checked and giving a guarantee. Adding a spouse, child or business partner to the share register has lending consequences, so decide the structure before you incorporate rather than after.

You will also need a company bank account, and rent should be paid into it rather than your personal account.

Limited liability does not extend to the mortgage. Effectively every limited company buy-to-let lender requires personal guarantees from the directors and main shareholders. Guarantees are often for the full loan amount, though some lenders cap them at a proportion of the balance.

Many lenders also require you to take independent legal advice on the guarantee before completion, which is a separate solicitor and a separate fee. Budget for it and factor it into your timetable, because it is a common cause of last-minute delay.

Expect company products to price a little higher than the equivalent personal buy-to-let, and expect the arrangement fee to be a percentage of the loan rather than a flat sum. Two per cent is common, so 4,000 pounds on a 200,000 pound loan.

Two things partly offset that. First, the lender panel for company lending has grown considerably and is now competitive rather than niche. Second, company applications are often stress tested at 125 per cent interest cover rather than the 145 per cent applied to higher-rate individual applicants, because the company is not subject to the interest relief restriction. On the same rent, that can mean a materially larger loan.

Deposit expectations are the same as personal buy-to-let in practice: at least 25 per cent, with better pricing at 60 to 65 per cent loan to value.

Take one property. Annual rent 12,000 pounds, running costs 2,000 pounds, mortgage interest 6,000 pounds. Cash profit before tax is 4,000 pounds in either structure.

Personally owned, higher-rate taxpayer. Taxable rental profit is rent less costs, so 10,000 pounds, because interest is not deductible. Tax at 40 per cent is 4,000 pounds, reduced by the 20 per cent credit on 6,000 pounds of interest, which is 1,200 pounds. Tax due is 2,800 pounds, leaving 1,200 pounds of the 4,000 pound cash profit.

Personally owned, basic-rate taxpayer. Tax at 20 per cent on 10,000 pounds is 2,000 pounds, less the same 1,200 pound credit, so 800 pounds. That leaves 3,200 pounds. The restriction barely bites, which is why incorporation is much less compelling for basic-rate taxpayers.

Company owned. Profit is 12,000 less 2,000 less 6,000, which is 4,000 pounds. Assume, for illustration only, corporation tax at the small profits rate of 19 per cent. Tax is 760 pounds, leaving 3,240 pounds inside the company.

So for the higher-rate taxpayer the company retains about 3,240 pounds against 1,200 pounds personally, on identical cash flows. That gap is why company purchases grew so quickly.

The caveat matters as much as the number. The 3,240 pounds sits in the company. Taking it out as a dividend triggers a further personal tax charge, which narrows or erases the advantage if you need the income now. Corporation tax rates, the small profits threshold, marginal relief and dividend rates all change, so check the current figures on GOV.UK and take advice from an accountant on your own position rather than relying on a worked example.

This is where enthusiasm meets reality. You cannot simply transfer a property you already own into your company. Legally it is a sale from you to the company at market value, and it carries the costs of a sale and a purchase.

Expect all of the following:

• Capital gains tax on the increase in value from when you bought it to the transfer, payable by you personally
• Stamp duty for the company on the market value, including the surcharge on additional dwellings, and in England and Northern Ireland this is SDLT, while Scotland charges LBTT and Wales charges LTT
• Early repayment charges on your existing mortgage if you are inside a fixed period
• A new mortgage application, valuation, legal fees and arrangement fee
• Independent legal advice on the personal guarantee

On a property worth 250,000 pounds with a 60,000 pound gain, the combined bill can easily run into tens of thousands of pounds. There are reliefs, including incorporation relief where the letting activity amounts to a genuine business run on a substantial scale, but it is fact-specific and contested territory. Do not assume it applies.

The general pattern is that incorporation makes most sense for new purchases going forward, while existing personally held property often stays where it is unless the numbers clearly justify the transfer cost.

A company files annual accounts and a corporation tax return, keeps a confirmation statement up to date, and needs its own bank account and bookkeeping. Accountancy fees of several hundred pounds a year per company are normal. That is modest against a large portfolio and material against a single property, which is another reason a one-property landlord on the basic rate often stays personal.

Because company buy-to-let criteria vary widely on guarantees, shareholder rules and acceptable structures, the MortgageMatch directory can help you find an FCA-authorised broker who arranges SPV lending regularly. Company buy-to-let is normally unregulated lending, so pair that broker with an accountant before you incorporate.