While the UK experienced a property boom during lockdown, buy-to-let (BTL) landlords aren’t necessarily reaping the benefits so easily, according to Andy Foote, director at UK property developer SevenCapital.
Foote says since the government imposed stricter rules on tax relief for buy-to-let landlords in a bid to professionalise the sector, 43% of landlords now invest and manage their properties through a limited company, with a further 48% planning to or wanting to know how to.
However, the pandemic and subsequent UK-wide lockdown forced lenders to tighten their belts to avoid risk. Landlords looking to buy via a limited company have had their applications rejected and, where they haven’t, the rates on offer simply don’t add up.
Below, Foote outlines the use of a bare trust when investing through a limited company.
Why have the rates increased for limited companies?
Quite simply because if you own a property through a limited company it is far easier, should you go bust, to write off the debt and it have little effect on you personally or any other assets you own. If you invest as an individual then you are completely liable and the lenders can hold you solely responsible, potentially seizing other assets to pay for the loss.
What’s the solution?
While it may not be the most straightforward or conventional way to invest, running a property through a bare trust is a mid-term alternative, especially at a time when the mortgage market is on its knees and working through the BTL process as an individual may not be the most tax-efficient way.
How would it work?
If you want to manage your property through a limited company because you get tax relief that no longer applies, this is where the bare trust comes in. Once you’ve completed on the purchase, you set up a limited company then you trade the property through that via the bare trust.
At the end of the tax year, HMRC should recognise that all the trading has been done through the Limited Company and so, all taxable income will be declared though that and you pay only the tax rates associated with a limited company, which is corporation tax.
Of course, that all sounds very simple, so you need to do your homework on the rates you personally can achieve and decide whether you prefer investing through a limited company or as an individual – after all, investing is circumstantial.
When the risk of a landlord going bust lowers because the UK’s economy recovers, lenders will likely reinstate better rates, which will make buying through a limited company feasible again. But right now, in our and our clients’ experience, the numbers just don’t add up.