26 Oct 2020

An investment consultancy says landlords seeking mortgages to acquire new properties via a company have been finding some applications rejected as lenders have tightened rules.

SevenCapital says there is an alternative – a so-called ‘bare trust’. 

This is where you buy the property as an individual (thereby accessing easier-to-get mortgages possibly at a much cheaper price than those for companies) but then you set up a limited company amd you trade the property through that via the so-called bare trust.

SevenCapital says the attraction of incorporation is obvious because if you own a property through a limited company it is far easier, should you go bust, to write off the debt and for it have little effect on you personally or any other assets you own. 

If you invest as an individual then you are completely liable and the lenders can hold you solely responsible, potentially seizing other assets to pay for the loss.

However, for that very reason, mortgage lenders – wary of the current economic uncertainty caused by Coronavirus – are sharply restricting mortgages to companies for buy to let.

Therefore a bare trust is seen as something of a middle road – easier purchase by buying as an individual, but more tax-efficient via managing the property through a limited company.

SevenCapital says that at the end of the tax year, HMRC should recognise that all the trading has been done through the limited company. So all taxable income will be declared though that and you pay only the tax rates associated with a limited company, which is corporation tax.

“When the risk of a landlord going bust lowers because the UK’s economy recovers, lenders will likely reinstate better rates, which will make buying through a Limited Company feasible again. But right now, in our and our clients’ experience, the numbers just don’t add up” says SevenCapital.

However – all buy to let investors are advised to seek advice from a financial adviser before entering any new investment deal.

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