Mortgages For Ltd Companies

[Greg Bowman]

I run a limited co. with enough profit to keep the family going - why do you want to punish me? Why is it okay for M&S to be a company, but not a small trader? The reporting requirements are quite exacting for a company, and not to be sniffed at. I wouldn't like to say that everything is fine for the current set up, but I've no idea why your idea of a solution is to crucify the small institution while hardly hitting the larger player.

+1 So the valiant which part of the public sector do you work in sucking away my taxes and profits ? Edited September 5, 2015 by Greg Bowman

[Bland Unsight]

+1 So the valiant which part of the public sector do you work in sucking away my taxes and profits ?

Maybe the banks?

(They continue to exist in their current form not because of the wisdom of the private sector, but because they destroyed themselves pursuing the supposed wisdom of the private sector and thus created a systemic threat to our system of money which was so profound that we essentially had to bail them and make them public. Hurrah for the infinite wisdom of the private sector - at least it knows how to f**k the public sector and walk away unscathed, bonuses and pensions intact.)

The idea that an abrupt difference between wholesome private sector enterprise and parasitic public sector trade union organised leeching does appear to have hit a very large outcrop of rocks - which it was driven onto by the private sector banks reckoning they knew how to play the government like a fiddle. Work is work. The rewards derived may be pecuniary or non-pecuniary, or a mixture.

Hating on the public sector just for being the public sector is problematic. We turned our back on work houses and debtors' prisons for a reason.

There are no simple answers. An ideological commitment that presupposes that there are simple answers may well represent a first step on a road to a seriously misguided appraisal of a complex problem space...

[Guest_growlers_*]

http://www.propertytribes.com/ltd-company-tax-loophole-set-to-close-t-127621585.html

"

seemingly throw away quote in an article produced by This is Money could herald a significant chapter 2 of the summer budget tax on landlords saga.

Chas Roy-Chowdhury, Head of Taxation at ACCA was quoted, whilst answering a question about incorporation being a way to avoid the tax changes, as

"The short answer to your readers problem is Yes - a corporate structure would now be better, but this loophole is set to be closed in the near future"

Three words here are significant, "loophole", "closed", "near"."

He he he.

Even if the incorporation / partnership route works they're screwed.

Edited September 8, 2015 by growlers

[Neverwhere]

The text has apparently changed slightly in the original article, but interesting nonetheless (emphasis added):

I am a buy-to-let investor: will I pay less tax if I set up a company for my properties?

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, replies: The Chancellor’s interest tax relief restriction may indeed prompt some landlords to consider transferring their buy-to-let property portfolio to corporate structures, which continue to benefit from relief on mortgage interest payments at the moment.

The short answer to your reader’s problem is ‘Yes’ - a corporate structure would now be better, but this loophole could be closed in the near future.

Furthermore setting up a company would only be beneficial to those who have a portfolio of properties rather than just one, and is a better option for those planning to hold on to properties over the long term.

Which ties in with this:

Vanessa Warwick 21-08-2015,11:41 AM

RE: Ltd company tax loophole set to close?

Thanks for spotting this Rupert.

I tweeted Chas Roy-Chowdhury and he responded as follows:



He also tweeted that he would create a Property Tribes account and respond in person, so I hope he will be along shortly as it would be great to hear from him first hand as to what prompted him to make this revelation!

[spyguy]

The text has apparently changed slightly in the original article, but interesting nonetheless (emphasis added):

Which ties in with this:

Yes. They might face lower yearly tax by setting up as a Ltd Co but ....

*THEIR MORTGAGE COMPANY WILL NOT ALLOW THEM TO TRANSFER THE (PERSONAL) MORTGAGES TO A LTD*

Is it that hard to understand?

[Neverwhere]

Yes. They might face lower yearly tax by setting up as a Ltd Co but ....

*THEIR MORTGAGE COMPANY WILL NOT ALLOW THEM TO TRANSFER THE (PERSONAL) MORTGAGES TO A LTD*

Is it that hard to understand?

Not really, but then I'm not an aggressively leveraged landlord

[Guest_growlers_*]

Yes. They might face lower yearly tax by setting up as a Ltd Co but ....

*THEIR MORTGAGE COMPANY WILL NOT ALLOW THEM TO TRANSFER THE (PERSONAL) MORTGAGES TO A LTD*

Is it that hard to understand?

Yes, they would have to pay early exit fees and secure new mortgage arrangements.

They would also have to pay sdlt and CGT if they don't meet criteria for incorporation relief.

Of course new finance would be required - there would be a new legal entity involved.

[spyguy]

Not really, but then I'm not an aggressively leveraged landlord

Sorry. It was not aimed at you.

The P118er think they just can just tippex-out 'Cecil Thicket' from the mortgage and write in 'Slumlord Co'.

[Neverwhere]

Sorry. It was not aimed at you.

The P118er think they just can just tippex-out 'Cecil Thicket' from the mortgage and write in 'Slumlord Co'.

No need to apologise, I was just joking around! Hence the wink

[pipllman]

remember too that a lot of them were savvy enough to expect that these low interest rates would not prevail for much longer

they have taken the opportunity to switch to long term fixed rate mortgages

at considerable cost in terms of set up charges and versus the variable rate right now

and with considerable early redemption / exit penalties

it isn't unreasonable to think that the combination of ingoing fees, exit penalties and new ingoing fees could be £10k or more per property

[Growlers2]

I was thinking of this further during the weekend. Had a look at the Paragon Mortgages:

http://www.paragon-mortgages.co.uk/our-products/limited-companies

http://www.paragon-mortgages.co.uk/our-products/individuals

A quick skim comparison and it seems to me that both sets of products are very similar in terms of rates and terms. i.e. they don't seem to be pricing incorporated lending at a higher rate.

I'd be really interested to monitor the volumes of new incorporated mortgages (not remortgages of existing BTLers restructuring - new buyers set prices) because on the face of it, going forward, to a new entrant incorporated BTLer things wouldn't be that different to how they stand at present. I would image incorporated lending will kick up significantly when the BoE affordability requirements (requiring tax charges be reflected in the rental cover) are implemented - presumably rental cover could remain at 125% for incorporated lending (whist moving to something like 145% [per NW] for unincorporated]?

One final thought, if incorporated BTL Numpty cottage industry BTL lending takes off in a big way I would imagine it would be much more complicated for the Government to restrict through the corporate tax code than it has been through the personal tax code. I doubt they'd be able to use such a blunt instrument (used so effectively in the Summer 2015 budget) as a restriction of mortgage interest tax deduct-ability as this would impact the larger professional landlords (as well as other socially useful companies) that the Government allegedly want to encourage.

I really hope the government is watching this space. It would be such a shame if in 10 years we are back where we started but just with a different ownership structure.

[Ah-so]

I was thinking of this further during the weekend. Had a look at the Paragon Mortgages:

http://www.paragon-mortgages.co.uk/our-products/limited-companies

http://www.paragon-mortgages.co.uk/our-products/individuals

A quick skim comparison and it seems to me that both sets of products are very similar in terms of rates and terms. i.e. they don't seem to be pricing incorporated lending at a higher rate.

I'd be really interested to monitor the volumes of new incorporated mortgages (not remortgages of existing BTLers restructuring - new buyers set prices) because on the face of it, going forward, to a new entrant incorporated BTLer things wouldn't be that different to how they stand at present. I would image incorporated lending will kick up significantly when the BoE affordability requirements (requiring tax charges be reflected in the rental cover) are implemented - presumably rental cover could remain at 125% for incorporated lending (whist moving to something like 145% [per NW] for unincorporated]?

One final thought, if incorporated BTL Numpty cottage industry BTL lending takes off in a big way I would imagine it would be much more complicated for the Government to restrict through the corporate tax code than it has been through the personal tax code. I doubt they'd be able to use such a blunt instrument (used so effectively in the Summer 2015 budget) as a restriction of mortgage interest tax deduct-ability as this would impact the larger professional landlords (as well as other socially useful companies) that the Government allegedly want to encourage.

I really hope the government is watching this space. It would be such a shame if in 10 years we are back where we started but just with a different ownership structure.

I do not think that it will take too long for HMRC/HMT to close this loophole. There is already a consultation on reducing the tax deductabilty of interest, so it is not a totally sacrosanct principle, unlike what the think in on the landlord forums.

https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation

The primary purpose of the tax changes in the budget was to raise tax. If people begin to avoid it using a simple Ltd company vehicle, the taxman will change the rules again.

[dgul]

I was thinking of this further during the weekend. Had a look at the Paragon Mortgages:

http://www.paragon-mortgages.co.uk/our-products/limited-companies

http://www.paragon-mortgages.co.uk/our-products/individuals

A quick skim comparison and it seems to me that both sets of products are very similar in terms of rates and terms. i.e. they don't seem to be pricing incorporated lending at a higher rate.

Always remember that just because the mortgage exists it doesn't mean that they will actually loan the money to you when you apply.

[porca misèria]

I do not think that it will take too long for HMRC/HMT to close this loophole. There is already a consultation on reducing the tax deductabilty of interest, so it is not a totally sacrosanct principle, unlike what the think in on the landlord forums.

https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation

The primary purpose of the tax changes in the budget was to raise tax. If people begin to avoid it using a simple Ltd company vehicle, the taxman will change the rules again.

BTL landlords can still offset interest against tax at 20%.

A company can only offset interest against tax it actually pays, which is also at 20%. But due to fall in future.

There are reasons why incorporating might help a landlord with tax. But getting back the relief they're losing isn't one of them.

[goldbug9999]

BTL landlords can still offset interest against tax at 20%.

A company can only offset interest against tax it actually pays, which is also at 20%. But due to fall in future.

Indeed, they cant offset it against any of the income tax or NI they have to pay on personally drawing down company profits.

Edited May 16, 2016 by goldbug9999

[dgul]

BTL landlords can still offset interest against tax at 20%.

A company can only offset interest against tax it actually pays, which is also at 20%. But due to fall in future.

There are reasons why incorporating might help a landlord with tax. But getting back the relief they're losing isn't one of them.

No - it really does help. For some reason this change to relief seems hard to understand...

Consider a BTL with rent of £101k and interest costs of £100k and who has another job earning up to the higher tax limit*

Situation now is that they pay 40% on their profit - so 40% of £1k = £400 - in tax.

In 2020 they'll pay 40% of their income - so 40% of £101k = £40,000 (more or less)

and then get a 20% rebate on their interest costs = £20,000

so resultant tax bill = £20,000.

If they incorporate the interest is fully deductible so the'll pay 20% corporation tax on their profit, so £200 tax. (Then take the profit (£800) as a dividend and pay 32.5% dividend tax on that.)

*I know about 45% and marginal rates, etc - it is a simplified exemplar.

[SarahBell]

Funny way to put it - the corporation can offset all costs against income and only pays CT on the profit (at 20%). eg, income £1M mortgage £900k corp pays CT on £100k, so pays £20k tax - person with same income/mortgage pays income tax on £1M (say £450k for ease of calc), but will (in 2020) only get a relief of %20 of mortage costs (£180k) so will have a tax bill of over £200k.

[this exclemplar person is, of course, screwed, as their tax bill will be >> than their income - but they might be able to sell or transfer into the co. structure if they haven't been too stupid with debt on the way in]

But if the person wants to take the money out as wages/dividends then tax is then payable on it too.

(The divi thing has changed I believe,)

But what's to stop a person claiming tax credits on a minimum wage income from the ltd company and leaving profits in the company to expand the portfolio/pay off the mortgage?

[porca misèria]

But what's to stop a person claiming tax credits on a minimum wage income from the ltd company and leaving profits in the company to expand the portfolio/pay off the mortgage?

I don't know the detail, but HMRC are wise to things people do with their own private company.

They're OK with minor tax optimisation (like paying myself national minimum wage + lower-taxed dividend), but I doubt that would extend to tax credits.

[Si1]

I'd have thought that the need to incorporate would have two further effects that would restrict amateur speculation on property:

(1) it represents a barrier to entry to accidental landlords

(2) it presumably makes it much harder to'forget' to declare anything to either your mortgage provider or the taxman

This make sense?

[goldbug9999]

I don't know the detail, but HMRC are wise to things people do with their own private company.

They're OK with minor tax optimisation (like paying myself national minimum wage + lower-taxed dividend), but I doubt that would extend to tax credits.

Dividend drawings count as income for the purposes of benefits and TCs, the capital value of the company also counts as as asset for means testing. Not drawing profits and claiming TCs is probably dodgy although I cant find an explicit rule about it.

[goldbug9999]

(2) it presumably makes it much harder to'forget' to declare anything to either your mortgage provider or the taxman

Very much so, the dedicated company bank account means all money in/out must be accounted for and its piss easy for HMRC to check. Any money going in would be assumed to be earnings by default.

Edited May 16, 2016 by goldbug9999

[Growlers2]

I'd be really interested to monitor the volumes of new incorporated mortgages (not remortgages of existing BTLers restructuring - new buyers set prices) because on the face of it, going forward, to a new entrant incorporated BTLer things wouldn't be that different to how they stand at present. I would image incorporated lending will kick up significantly when the BoE affordability requirements (requiring tax charges be reflected in the rental cover) are implemented - presumably rental cover could remain at 125% for incorporated lending (whist moving to something like 145% [per NW] for unincorporated]?

Seems this is happening:

http://www.mortgagestrategy.co.uk/foundation-home-loans-to-increase-rental-coverage-ratio/

Foundation Home Loans is set to become the latest lender to increase its rental cover requirements.

In June the lender will increase its rental cover requirements from 125 per cent to 145 per cent for individual applications, while limited company products will remain 125 per cent.

The Bracknell-based lender’s commercial director, Simon Bayley, says: “There is no doubt that with the new restrictions on tax relief which landlords can claim back and now the hardening of the rental cover calculation, the limited company option is really gaining ground for a greater percentage of landlords, particularly those who are coming to BTL at this point.

“We have been delighted by the response to our limited company offering, which is priced at the same rate as our individual BTL products. Intermediaries and their landlord clients are recognising the efficacy of a limited company option and as long as there is a recognition of the pros and cons, the scales are coming down more heavily in favour of this approach.”

http://www.keystonepropertyfinance.co.uk/downloads/Keystonetointroducesplitstresstests.pdf

Keystone Property Finance is to introduce separate stress tests for individual and limited company borrowers. The change in policy applies to products in the Classic Range which is funded by Paratus AMC and will come into effect on 14th June 2016.

For individuals a new formula of 145% at pay rate or notional rate of 5.25%, whichever is higher, will be applied to term trackers and 3 year fixed rates. For borrowers choosing a 5 year fixed rate, the payrate will be used.

Stress tests for limited companies will remain at 125% of pay rate or notional rate of 5.25%,whichever is higher, for term trackers and 3 year fixed rates. For limited company borrowers choosing 5 year fixed rates, the pay rate will be used.

Increasing stress tests for individual borrowers is expected to be the direction of travel for the buy to let industry in light of the forthcoming caps on finance costs and the proposals for stricter underwriting standards as set out in the PRA’s consultation paper (CP 11/16).

Commenting on the pending policy change, David Whittaker, managing director of Keystone said:

“We are keen to demonstrate that we take borrowers’ affordability extremely seriously and have been working on this criteria update with Paratus AMC for some weeks now. “Crucially, individual borrowers who can show that they are basic rate tax payers now, and are likely to be in future, can ask for the lower stress test to be applied. These applications will be considered on a case by case basis. Our underwriters will assess the individual’s circumstances and portfolios very carefully and ask to see the last two years’ tax returns to prove that income is within the lower tax bracket limits.”

“The stress test for limited company applicants will remain at 125% of pay rate because corporate vehicles will not be financially affected by the new tax relief restrictions. Keystone is one of the few buy to let lenders which offers products to trading limited companies as well as Special Purpose Vehicles. Earlier this year it reduced pricing in the Classic Range and made the rates available to both individuals and limited companies, where previously rates for corporates attracted a small premium.

Brace for corporate BTL!

[Growlers2]

I do not think that it will take too long for HMRC/HMT to close this loophole. There is already a consultation on reducing the tax deductabilty of interest, so it is not a totally sacrosanct principle, unlike what the think in on the landlord forums.

https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation

The primary purpose of the tax changes in the budget was to raise tax. If people begin to avoid it using a simple Ltd company vehicle, the taxman will change the rules again.

I remember reading about this legislation. It scared quite a few of the Property118 crowd as I recall. Without reading through it again, this was a pretty unique OECD sponsored proposal to restrict tax evasions through profit shifting or something.

If you wanted to structure legislation in the corporate tax code, to increase the cost of credit to small scale BTLers speculating on residential property, whilst allowing credit to flow to larger professional landlords, how would this be achieved?

Perhaps something about requiring x properties being owned before mortgage interest was fully tax deductible and/or a de minis threshold for assets held. I supposed that wouldn't be without president - wasn't there some debate about the stamp duty changes only applying if fewer than x properties were owned?

[Growlers2]

https://www.gov.uk/government/statistics/incorporated-companies-in-the-united-kingdom-march-2016

Check out the jump in company registrations in March. Well above historical trend.

I'd bet allot of this is BTL related.

[CunningPlan]

I remember reading about this legislation. It scared quite a few of the Property118 crowd as I recall. Without reading through it again, this was a pretty unique OECD sponsored proposal to restrict tax evasions through profit shifting or something.

If you wanted to structure legislation in the corporate tax code, to increase the cost of credit to small scale BTLers speculating on residential property, whilst allowing credit to flow to larger professional landlords, how would this be achieved?

Perhaps something about requiring x properties being owned before mortgage interest was fully tax deductible and/or a de minis threshold for assets held. I supposed that wouldn't be without president - wasn't there some debate about the stamp duty changes only applying if fewer than x properties were owned?

Perhaps something as simple as capping the amount of deductible interest to 20% of turnover. This would work well whilst not affecting any 'normal' business. After all, any business paying that much interest is really just a borrowing and lending machine, not a properly functioning company.