Landlords are increasingly likely to own investment properties both as individuals and through limited companies, and advising them may prove a challenge, intermediaries have admitted.
Research by Precise Mortgages last week found a ‘dramatic swing’ towards landlords favouring purchasing new properties through limited companies, rather than as individuals, particularly among portfolio landlords.
It found that almost two-thirds (64 per cent) of landlords with four or more properties who planned to buy this year would do so through a company, compared to 21 per cent who planned to buy as individuals.
This is compared to just 17 per cent of landlords with one to three properties planning to purchase through a company.
The mortgage advice process
David Sheppard, managing director of Perception Finance, said that he was starting to see portfolio landlord clients look to purchase new properties through a limited company, while leaving their existing properties in personal names.
He said that as more properties are added to the company this will increase the level of administration work required by brokers, though suggested this need not be a “major challenge”.
But Adam Hosker, founder of Bespoke Finance, argued: “The advice process for property investors is challenging,” adding that while brokers know that there can be some tax benefits to buying through a limited company, this is very much dependent on circumstances.
He noted that what sets the advice process apart for these borrowers is a pre-DIP checklist of ensuring the company has the correct Standard Industrial Classification (SIC) codes, does no other trading activity and that the shareholding and directorships match the application.
Hosker added that it’s important to ensure borrowers are aware that conveyancers charge more for limited company cases, while clients will also need separate legal representation from the company.
Jane King, mortgage consultant at Ash-Ridge Personal Finance, suggested that advising landlords who are considering moving some of their portfolio over can be “complex”.
She pointed out that with some lenders refusing to allow a limited company to ‘buy’ a property from an individual who is also a director of the purchasing company, the lending choices can be more limited.
The importance of getting tax advice
King said that she always suggests clients who are looking to switch some or all of their portfolio over to limited company status get advice from an accountant due to the tax implications.
She added that while most of her clients have considered this, many have been put off by factors including the additional documentation that goes with limited company ownership and the stamp duty costs from transferring ownership into the business.
Sheppard agreed that he always emphasised the importance of advice, noting: “The implications of stamp duty and capital gains tax are just some of the factors that need to be considered and properly priced into the transaction for those looking to do this.”
What happens next?
King suggested that while there will always be some investors who feel happiest with their money in property, others – particularly higher rate taxpayers – are slowly selling up and exploring alternative options.
She continued: “I feel that this type of investment will become less attractive in the future with more investors looking at other types of asset class unless there are some changes to the current tax rules for individuals.”
Hosker suggested that the trend will be for lenders to offer the same products when buying as an individual as for those buying through a limited company, saying: “With more lenders entering the fray it’s becoming more competitive.”
Sheppard added: “I do feel that more and more people will switch to buying in a limited company as, even though the interest rates tend to be higher for this type of business, this is being seen as more cost effective against the income tax changes that are gradually coming in.
“There will be some that will stick to personal names but this will be mainly those that are zero or lower rate taxpayers.”