Lettign current property and moving to a new house

Fork_It_Off

I know it is very difficult and much harder to profit on these days but I am looking into the possibility or renting my current house out and moving to another property (which we were looking at buying and selling anyway), the extra complication is we have a fix mortgage with HSBC which doesnt run out until October next year so will either have to port or pay early repayment charge 1% (2.2k).  After intial research it looks like the only way to make it worthwhile is to do it through a limited company, benefiting from the two stamp duty holidays helps aswell.

Here are my details:

Current property value 420k
Current property likely rental (£1500pcm) low yield I know but solves some other issues for us.
Current mortgage debt 220k
Current equity 200k
Current mortgage is a fix 1.19% ending October 1st 2021
Current house new deposit 100k

Next house value (max possible) likely 600k
Next house max borrowing from HSBC 505k
Next house starting deposit 100-120k

So questions:
1- What would be the most tax/cost efficient way both on rental and capital gains to go ahead with this, limited company yes/no, pros/cons.
2- Im struggling to find many decent deals for buy to let mortgages specifically ones through limited companies, any reccomendations?
3- Anything else I havent really considered or useful advice?

Thanks

[Deleted User]

1. What do you plan to do with the rental income?  Do you plan to withdraw this from the company or would you keep this in there to invest in further properties?  What tax bandings do you fall in to? Whats your long term plan for this property?   What do you see the benefit of going down the Ltd company route? 

2.  BTL mortgages through high street lenders are cheap. They tend to have more set up costs than residential mortgages but on the whole they are roughly on par with residential mortgages for rates.    If you start to go to Ltd company then you lose all the mainstream lenders and move to specialist lenders.   These specialist lenders dont do the same volume of business so the cost of running the company falls on fewer people and the fees and rates are higher.  They also tend to deal with people who have multiple properties and portfolio landlord assessments are much more time consuming (costly) to underwrite.  The cost of this extra time gets passed through the rates.    A high street lender may do your BTL at around 1.9% with a £999 fee whereas a LTD company deal would be around 3.4% with £3k+ set up cost. 
You will need an accountant to tell you if its worth paying the extra costs based on the answers to question 1 above


3. Have you spoken to a mortgage advisor re your affordability on the new purchase with HSBC?   Only reason i ask is that they arent great for purchases when you have background buy to lets that havent been rented out yet.   They will take the mortgage payment and all running costs (council tax, gas/elec/water etc) from your affordability on your new purchase.   Other lenders ignore background BTL even if they havent been rented out prior to completion so usually will lend higher amounts on these types of cases.   Once you've established the property as a BTL and got proof of it being rented out for 3months at least then HSBC can ignore the running costs

Sibbers123

1. The transfer to the limited company will trigger a SDLT charge based on market value (3% surcharge will apply). Interest rates are higher if the property is held via a limited company rather than in your personal name but there are tax benefits, especially if you are higher rate tax payers (i assume you are due to the size of mortgage you will be obtaining on your new property). The benefit of transferring to a Ltd co will mean the surcharge will not apply on you new dwelling (based on the information provided).

2. Interest rates are higher for limited companies.

3. That is a low yield! Unless you can get a favourable interest rate, you would probably be better off realising the equity and investing in the stock market via a pension/S&S ISA/index funds.

K_S

@Fork_It_Off If I were considering doing what you are proposing, the most important aspects to me would be -
1. What will be the chargeable gains arising from transferring the property from your personal ownership to your company. If it has been your main residential property all through, then that's nil and good to go.
2. SDLT payable by the company - £12,600 (3% of 420k). Also by "selling" you will avoid paying the 3% SDLT surcharge (£18,000) on the 600k property purchase or be eligible for a refund when the transfer is completed.
3. Top of my head profit calcs (assuming you are not planning to release any equity from the rental property), 220k mortgage, 1500 monthly rent, assumed 4% interest rate (including the effect of the fee) for a 5 year fix, gives a max pre-tax profit of around £750/month which will futher reduce with other expenses in letting and maintaining the property.
4. Roughly speaking, positives of a Ltd Co setup are that this will be taxed first at 19%, and the remaining can be taken out in tax efficient manner of your choosing. Plus mortgage interest is tax-deductible. If the property is jointly owned by a married couple, the opportunities for tax efficiency jump.
5. Negatives are, if you NEED to be able to extract the profit every month, you lose a lot of the advantages of being within a ltd co. Also, you may need to pay for the services of an accountant if your level of knowledge in accounting and tax matters is lacking.
 6. Unfortunately, as you have discovered, ltd co BTL mortgages charge a significantly higher interest rate than personal BTL mortgages and in many cases a significantly higher fee too. Depending on the rest of your scenario, as a first time landlord you may also be looking at a smaller pool of potential products. The only person who can give you a firm idea of your options would be a mortgage broker, ideally one that does significant BTL mortgage business.
All things considered, if I absolutely HAD to retain the existing property to let, based on what you have said I would keep it as a personal BTL if either I was a basic rate taxpayer or it was jointly owned with a non higher-rate taxpayer spouse. If the profit would definitely be taxed at 40/45%, in that case a ltd co might make more sense.
I hope that helps!

K_S

Sorry about the the formatting, not able to edit it!