Whether a trading premise or a rental investment, financing a property purchase can be fairly complex if you’re applying through a limited company – but a broker can make the process far more streamlined!
Facts You Need to Know About Business Buy to Let Mortgages
There are a few key facts to be conscious of, particularly if you’re thinking of using a commercial mortgage to purchase a rental property as a landlord:
- Limited company mortgage rates are usually higher than a standard buy to let mortgage product.
- Stamp Duty is payable on the corporate rates throughout the UK.
- Landlords trading as a limited company can claim tax relief on deductible expenses, including financing costs and mortgage interest.
- Corporation tax remains payable against net rental profits at 19%.
- Capital Gains Tax (CGT) is a factor since you won’t receive a tax-free allowance as a business.
- Property transfers can incur Stamp Duty and CGT, including a transfer of a buy to let property to a limited company.
We’ll run through the relevant factors in more detail below so you have a better idea of how to account for your mortgage interest expenses.
Illustration of Tax Rates and Brackets for Commercial Rental Mortgages
We’ve looked at how mortgage brokers could impact your cash flow and why your tax bracket impacts your overall profitability – showing the comparison between a limited company and a basic and higher rate taxpayer.
|Private basic rate taxpayer||Private higher rate taxpayer||Limited company|
|Monthly rental income||£10,000||£10,000||£10,000|
|Theoretical mortgage interest||£2,500||£2,500||£3,500|
|Property running costs||£2,000||£2,000||£2,000|
|Total tax liability (before interest relief)||£1,600||£3,200||N/A|
|Mortgage interest relief||£500||£500||N/A|
This example clearly shows why a buy to let mortgage through a limited company may be preferable to a private rental mortgage, based on current tax rates.
The caveat is that you will still need to pay Income Tax on drawings you make from your rental company – although you can balance this between salaries and dividends to minimize your tax exposure further.
Deducting Profits From a Commercial Property Rental Business
If you’re keen to understand whether it’s preferable to transfer property to a limited company (usually a Special Purpose Vehicle) or keep your rental residences as a private asset, one of the core considerations is how you deduct profits.
Limited companies enable you to access income in several ways, including:
- Declaring dividends
- Drawing a salary
- Making pension contributions
- Repaying a director’s loan if you’ve made capital injections
Let’s say you go with a commercial buy to let mortgage and make a net profit each month of £3,645, as shown in the above illustration.
You can declare up to £2,000 in dividends per year tax-free, so it’s important to seek advice about the best opportunities to draw income without paying more tax than you need to.
Example Income Split for SPV Directors With a Commercial Mortgage
|One owner – basic rate taxpayer||One owner – higher rate taxpayer||Two shareholders and directors|
|Dividend value||£3,645||£3,645||£3,645 (shared)|
|Taxable dividend income||£1,645||£1,645||£0|
|Dividend tax charge||7.5%||32.5%||N/A|
The above example illustrates why it’s important to grasp the tax rates and profit extraction methods when working out the accurate profits you’ll make on a commercial buy-to-let mortgage.
Lenders will look at all these factors to decide whether to lend – although your personal income may not be as big a factor if they are offering to finance a limited company application.
Commercial Buy to Let Mortgage Criteria
If you’ve worked through these calculations and have a clear business plan, you’ll have a significantly better chance of achieving highly competitive buy-to-let mortgage rates.
Assessments vary depending on whether you’re applying for your commercial BTL mortgage as a private individual or an incorporated company – and, although interest rates are higher for the latter applicant, you can make sizable tax savings, as we’ve shown.
Most landlords applying for a mortgage through a company set up a Special Purpose Vehicle, a particular type of company designed to manage rental property assets.
Your selected mortgage lender will ask about:
- The property – type of residence, location, and value.
- Portfolio – how many other properties you own (if any) and in what structure.
- Personal information – credit history.
- Company details – the number of shareholders and directors (the maximum is normally four).
Our advice is always to work with an independent broker to put together a compelling application, following a comprehensive analysis of the borrowing options best suited to you.