First time buyer buy-to-let or via Ltd Co?

[jammy-git]

This is more of a curious musing and I appreciate that the housing market is looking more shaky than it has in a long, long time, so right now might not be the best time to action this idea...

However, my personal situation is that I'm a long, long way from being in a position to buy a house suitable for myself, my partner and kids here in the South East. We would like, however, to get on the property ladder sooner rather than later and that led me to think about how possible it would be to buy a buy-to-let in a cheaper area of the country.

From a quick bit of research it seems that we'd need to find 25-30% deposit for a BTL mortgage as a FTB, but pulling that sort of deposit together on a £100k property is much easier than 20% on a £400k property! It also looks like affordability and yield criteria are more stringent on a FTB BTL mortgage?

Then it got me thinking; would it be easier instead to buy said property via a Ltd company? As a company owner I already earn income via PAYE + dividends, so I'm no stranger to business admin and SA100s. I believe as a director I would have to give a personal guarantee on the company mortgage - but would this route be easier than trying to get a BTL mortgage personally as a FTB? I'm not looking to use a Ltd co for any tax advantages - all the income would remain in the company to pay for the costs of the BTL and the company would solely be used for BTL property.

[22s]

In general, yes it makes more sense to do it in a ltd co. Mortgage will be easier to get in my experience. You might struggle with 80% LTV in this market without chinning a horrific rate.

You say you're not interested in the tax advantages, but in case you weren't aware, if you buy the property as a private individual you cannot offset the mortgage interest against your rental income - whereas you can with a ltd co. This makes a a massive difference to the feasibility of the investment.

[MaxFromage]

I disagree with the above. It is not, in general better to go down the ltd route. There are many pros and cons, which are too numerous to list. Have you thought about the fact you'll have associated companies? Your accountant will be able to advise best based on a number of personal factors only applicable to you.

[Eric Mc]

Capital Gains Tax becomes VERY complicated when you have a property in a limited company.

[jammy-git]

Eric Mc said:

Capital Gains Tax becomes VERY complicated when you have a property in a limited company.

That's why there are people like you!

[Panamax]

jammy-git said:

my personal situation is that I'm a long, long way from being in a position to buy a house suitable for myself, my partner and kids here in the South East. We would like, however, to get on the property ladder sooner rather than later and that led me to think about how possible it would be to buy a buy-to-let in a cheaper area of the country.

You'll burn your first time buyer status (Stamp Duty)
You'll pay significant costs of acquisition
You'll need to pay an agent locally to manage it
You'll get slapped with enhanced rate Capital Gains Tax when you sell
You'll have the costs of sale to pay.

Assuming you're not already maxing out both of your ISA allowances (2 x £20k = £40,000 p.a.) you will almost certainly do better with a reasonably cautious portfolio of investments growing tax free in an ISA with very low fees/charges.

The BTL boat sailed a long time ago, unless you're a professional landlord.

[Jon39]

jammy-git said:

This is more of a curious musing and I appreciate that the housing market is looking more shaky than it has in a long, long time, so right now might not be the best time to action this idea...

However, my personal situation is that I'm a long, long way from being in a position to buy a house suitable for myself, my partner and kids here in the South East. We would like, however, to get on the property ladder sooner rather than later and that led me to think about how possible it would be to buy a buy-to-let in a cheaper area of the country.

Madness.

A sole principle private residence is the best property to own because it is (presently) tax free (if the value increases), but I can understand that at the moment, home prices especially in the south east are ridiculously high in relation to incomes. Possibly that might change soon. A home is normally somewhere to live, eventually at minimal cost when the mortgage is redeemed, not really an investment. Home owners rarely sell up, then live in a tent.

What you are attempting to do is create an investment, but the particular type of investment that you have selected (domestic property) is unlikely to produce a worthwhile return for you, as outlined above by Panamax. Buy to let sometimes also involves nightmares for the property owners,
eg. rogue tenant won't pay and won't leave, but landlord still has to pay the mortgage. Disaster.

Edited by Jon39 on Monday 17th July 09:28

[Puzzles]

Last time I checked ltd co rates were much higher which totally offset the advantage.

Maybe things have changed now?

[Eric Mc]

Corporation Tax is set at 19% up until profits exceed £50,000 and then increases to 25%.

Extraction of money from a limited company will result in an income tax charge on the director/shareholder and possible NI charges too.

When the property is sold, the company will need to pay Capital Gains Tax. If the shareholders extract the sales proceeds from the company, they will pay personal Capital Gains Tax. So, they end up paying CGT twice - not a great situation.

[Frimley111R]

The idea is sound but BTL homes are increasingly challenging. Have a look at commercial property.

[Jon39]

Eric Mc said:

When the property is sold, the company will need to pay Capital Gains Tax. If the shareholders extract the sales proceeds from the company, they will pay personal Capital Gains Tax. So, they end up paying CGT twice - not a great situation.

Of course it could be a tax-free transaction.

'The average house in the UK currently costs around nine-times average earnings, based on data as at 30 November 2022.
The last time house prices were this expensive relative to average earnings was in the year 1876, nearly 150 years ago.'

Speak to most home owners though and house prices will always keep going up.
Not so, if anyone looks back to certain historic periods. Try 1990.
So often leverage would be involved, therefore any price decline results in equity magnification, but in a negative direction.

[Eric Mc]

Like any investment, you could end up making a loss.

However, very few people enter into property purchases expecting this to be the outcome.

[Jon39]

Eric Mc said:

Like any investment, you could end up making a loss.

Yes.

Eric Mc said:

However, very few people enter into property purchases expecting this to be the outcome.

A very confident, optimistic group of people, or they were until recently. Some will have been tempted to over borrow, during the period of unprecedented, extremely low interest rates.

Circumstances have changed so much, that many BTL owners have sold, or want to sell.
Difficulties keep being presented to landlords, each one reducing the investment attractiveness. The latest proposal that I heard about, if there is a Labour government, are legal rent c ontrols. Intervention in the free market between a willing landlord and willing tenants, to limit the amount of rent payable. Has been tried before.

A week or so ago, I listened to a lady who phoned a radio talk show. She was in tears, unable to pay her considerably increased BTL mortgage, because she could not evict a rogue tenant who had stopped paying. Repossession was expected.

Very different BTL times now, compared to say 2010.

[Frimley111R]

Jon39 said:

Of course it could be a tax-free transaction.

'The average house in the UK currently costs around nine-times average earnings, based on data as at 30 November 2022.
The last time house prices were this expensive relative to average earnings was in the year 1876, nearly 150 years ago.'

Speak to most home owners though and house prices will always keep going up.
Not so, if anyone looks back to certain historic periods. Try 1990.
So often leverage would be involved, therefore any price decline results in equity magnification, but in a negative direction.

Except they have risen nonstop. Sure, in 1990 they had a dip but a few years later they were racing back past their pre-1990 prices and have massively increased since then. At 54 years old I've never seen house prices drop in my lifetime. They may slow/plateau but there's still a ton of money out there to keep it going and even it doesn't, it won't drop back much.

[nyt]

One other thing to consider.

I have a buy-to-let. I've had it a good few years but it's not really in an area that doing well. I'd like to sell and buy in a better area.

If I owned through a company, that would be a simple transaction.
As I own it personally, I'm going to have to pay capital gains tax on the increase in value so I won't be able to do what makes sense from a business point of view.

[Eric Mc]

nyt said:

One other thing to consider.

I have a buy-to-let. I've had it a good few years but it's not really in an area that doing well. I'd like to sell and buy in a better area.

If I owned through a company, that would be a simple transaction.
As I own it personally, I'm going to have to pay capital gains tax on the increase in value so I won't be able to do what makes sense from a business point of view.

If it was in a company, the company would pay CGT on the property sale.

In addition, it is highly likely that you would also pay personal CGT if and when you extracted the sales proceeds from the company.

[DaveRed08]

As someone who works in accounting, all I will say is if you are thinking of going through the Ltd company route to buy it, speak to your accountant first! That way they can make sure you don't shoot yourself in the foot tax wise

[Countdown]

Eric Mc said:

If it was in a company, the company would pay CGT on the property sale.

In addition, it is highly likely that you would also pay personal CGT if and when you extracted the sales proceeds from the company.

You'd be paying income tax / dividend tax when you take money out of the company. Why would you pay CGT and how even would you calculate it?

[Eric Mc]

Countdown said:

You'd be paying income tax / dividend tax when you take money out of the company. Why would you pay CGT and how even would you calculate it?

It depends on whether the individual merely extracts the cash from the company or winds up the company once its property assets have been disposed of.

The point that is important is that, having paid CGT on the property disposal in the company, further tax liabilities (whether Income Tax or CGT) would be payable by the individual. If elements of the cash was withdrawn by means of salary, then there would also be NI due.

[Candellara]

Puzzles said:

Last time I checked ltd co rates were much higher which totally offset the advantage.

Maybe things have changed now?

Agree. When we looked at Ltd Co the BTL mortgage rates are considerably more expensive offsetting any advantage. Our accountants advice was Ltd Co only if you plan to purchase multiple properties to let