One of the biggest decisions facing landlords in recent times has been whether to incorporate new purchases, or existing portfolios, into a limited company structure.
Historically speaking, this was a far more straightforward decision for many pre-2016. However, over the past five years or so, we have seen a wave of well-documented tax changes and a substantial closing in the gap between the headline rates of limited company options in relation to ‘standard’ buy-to-let products. The volume of limited company deals has also improved dramatically during this time.
To incorporate or not to incorporate remains a hot topic throughout the industry. We often see articles around the benefits of limited company offerings and this education process remains vital.
But for the purpose of this piece, let’s turn this approach on its head slightly to focus on three drawbacks associated with limited companies – 1. Tax and capital gains, 2. Conveyancing and 3. Personal guarantees and outline, how landlords with the support of intermediary partners, can overcome them.
Tax and capital gains
We don’t need to dwell too much on the specifics but purchasing an investment property within a limited company structure – rather than as an individual – has become much more appealing in recent times due to various government-led modifications from a tax perspective.
Having said that, there is a major tax-related factor which limited company landlords still need to take into account – Capital Gains Tax.
The main reason being that there are no Capital Gains Tax allowances for limited companies when selling investment properties compared to when holding the property as an individual, as Limited Companies are not liable for Capital Gains Tax – Corporation Tax may apply here.
The biggest takeaway from this is the value attached to specialist tax advice for landlords. Of course, tax experts won’t enable landlords to avoid the inevitable but they will help ensure that they remain as tax efficient as possible.
Now intermediaries aren’t expected to administer such advice themselves but they can help facilitate this by having a two-way referral process in place with a trusted tax partner. And this is a relationship which could prove to be a win-win solution for their clients and their business.
Conveyancing
The conveyancing process can be something of a minefield for limited companies, especially for those who don’t have a relationship in place with a solicitor who is sufficiently experienced in such transactions.
It’s also the case that some lenders will force the borrower to only use a conveyancer from a limited panel, which can cause its own set of challenges.
In short, such cases tend to involve a more complex legal process, meaning landlords need to think carefully about their legal representation.
If they already have a trusted legal adviser then the option of working with lenders who don’t restrict this choice may appeal.
And intermediaries who understand how certain lenders operate in this area can better support their landlord clients in making the right choices for them.
Personal Guarantees
Typically, one of the benefits outlined when operating as a limited company is that it removes any personal liability from creditors.
This is a valid point but, when it comes to funding, this doesn’t stop many lenders from asking for a personal guarantee.
On a positive note, not all lenders carry such a caveat and it’s important for advisers to understand and point out that options are available for those landlords who are – for whatever reason – not comfortable in signing a personal guarantee.
Whether your clients choose to invest in buy-to-let properties in their own name or through a limited company, the market is becoming ever more competitive and more complex.
A combination which only serves to highlight the value of the advice process and the opportunities on offer for proactive intermediaries.
Andy Valvona is national account manager at CHL Mortgages
