Buy-to-Let - set up company or partnership

boomboom82

Hi Guys

Newbie to the forum- hope all are well.

i have a question which i hope someone can help with. i am sure it is relevant to people on the board and someone will be able to give me some advice or things to consider

There are a group of 4-5 of us who are looking to put say £25-£30k each into buying around 5 buy-to-let properties. these would also be mortgaged. the issue we have is whether we should do this through a partnership or whether we would be better setting up a company and buying the properties through the company. 2 of us are higher rate tax payers in our current jobs.

we would look to over the next few years increase the number of properties that we have.

it would be good to get people's thoughts on advantages of a partnership over limited company and vice versa.

all help is gratefully recieved and i thank you all in advance

taxsaver

Although in the majority of cases I advise clients to put BTL properties into their own names, rather than through company, there are some exceptions and this is one of them.

The problem with a partnership is that it carries with it unlimited liability (let's not stray into the realms of LLP's here as it's not relevant) and that each of the partners can bind ALL of the partners, so the risks are manifold!

The other advantage of a limited company in your circumstances are that any profits are the company's and are taxed as the company's, rather than on each of you as individuals. You only incur personal tax on any monies taken from the company, be that by way of dividend or salary; if dividends are drawn they are paid net of basic rate tax and only higher rate tax payers would have some extra tax to pay.

JQ.

I would imagine that getting bank finance for a newly formed limited company could be very tricky indeed. Surely that would fall into the realms of commercial finance and not BTL mortgages.

taxsaver

BTL 'is' commercial lending and being a newly formed company shouldn't be an issue as the loans will be secured on the houses that the company is purchasing. The banks will look at the covenants of the directors and might also look for their personal guarantees.

boomboom82

hi guys all valid responses and issues highlighted noted.

to be fair we would be looking at having around £120,000 of capital and the houses are around £70-80k each so we would have around 40% loan value on 4 house say. hopefully, bank finance would not be an issues.

I guess the tax issues are that:

1. in ltd company the company would get charged a lower rate of corp tax than me as higher rate tax payer. but then any dividend paid to me would be taxable at higher rate for dividends.

2. if selling the houses, company liable for chargeable gains - if we were then wanting to cease the business could i pay the all the cahs as a dividend and then cease?

tax saver - is it the fact that a few of us are higher rate tax payers the reason you would suggest limited co as opposed to partnership.

i guess we also have to consider double taxation of extraction via dividends and the when we ultimatley will cease the business in the future.

Thanks for your comments btw

JQ.

taxsaver wrote: »

BTL 'is' commercial lending and being a newly formed company shouldn't be an issue as the loans will be secured on the houses that the company is purchasing. The banks will look at the covenants of the directors and might also look for their personal guarantees.

What I meant is that BTL products are off the shelf products available to jo public, with set criteria in place. Commercial lending is lending to companies, usually up to around £25m and Corporate lending is generally above £25m.

The credit committees at pretty much all banks are seriously restricting their lending to Ltd companies and SPV's on property lending due to their recent losses.

Whilst from a tax point of view setting up a Ltd Co might be beneficial, the OP needs to investigate the restrictions on finance this may have and the additional costs that will be incurred, in terms of fees, rates and LTV's.

I would speak to a commercial finance broker rather than IFA to get some advice before committing to any particular structure.

taxsaver

boomboom82 wrote: »

2. if selling the houses, company liable for chargeable gains - if we were then wanting to cease the business could i pay the all the cahs as a dividend and then cease?

tax saver - is it the fact that a few of us are higher rate tax payers the reason you would suggest limited co as opposed to partnership.

i guess we also have to consider double taxation of extraction via dividends and the when we ultimatley will cease the business in the future.

Thanks for your comments btw

It's partly due to your tax positions, but as much about the fact that there are five of you and given the unlimited liability of a partnership it is much safer to use a company I feel.

Companies do not pay capital gains, it's taxed as profit in the normal way. paying out by dividend isn't suffering 'double taxation' as the dividends are deemed to be net of basic rate tax; it's only the higher personal rates of tax that become due if appropriate and there are often ways to mitigate that anyway.

prudryden

Before the days of the term "buy to let" mortgages, they were just mortgages with a higher interest rate. When I questioned Barclay's why they wanted a higher rate, they explained to me that they would like a piece of the action. And that is what I guess commercial loans are all about.