Our London office is seeing an increase in the use of UK companies as vehicles for purchasing UK buy-to-let (BTL) property, regardless of the nationality and residence of the beneficial shareholders.
The probable reasons are as follows:
- The UK Corporation Tax rate is highly competitive. It is currently set at 19% and is scheduled to reduce to 17% prior to the UK Financial Year 2020/21, which would be the lowest corporate tax rate in the G7.
- Net rental income and net capital gains would only be subject to these lowering rates of UK corporation tax. Non-UK resident individuals and non-UK companies are exposed to tax on net rental income and, as from 2015, UK CGT applies to non-UK resident owners.
- The ability to obtain mortgage finance through a UK company is essential. As a result of the changes to income tax relief on finance costs, on 1 January 2017, the Prudential Regulation Authority (PRA) introduced new guidelines requiring lenders to tighten affordability checks on buy to let landlords borrowing personally. However UK limited companies do not pay income tax, so these new guidelines do not apply. This means that lenders are able to give them more generous income cover ratios.
Sovereign is currently working with an Asian family that is neither domiciled nor resident in the UK. It wishes to purchase a portfolio of UK buy-to-let properties and has secured a loan-to-value (LTV) ratio of at least 75% on an interest-only mortgage basis at an interest rate of less than 4% pa.
Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability. However, from 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. This change applies only to private individual landlords and not to those who own property through companies.
Many more banks are willing to lend to a UK company purchasing property than to a UK non-domiciled resident or a non-UK resident individual who is seeking to purchase in their own name, or to a non-resident company.
Sovereign is able to source life assurance on a case-by-case basis to insure against any UK IHT liabilities that might result from the untimely or unexpected death of a relevant shareholder of a UK company, even where the shareholder is not a UK national and is not a resident of the UK.
As the UK company will be renting out the underlying property to third parties, the Annual Tax on Enveloped Dwellings (ATED) will not apply.
UK corporation tax can be deferred and is payable against net rental income, thereby avoiding any withholding of collected rent for taxation purposes by rental agencies. This should result in enhanced profitability and the ability to re-invest profits into additional UK property.
For further information on the use of UK companies for purchasing UK buy-to-let property, please contact Simon Denton, Managing Director of Sovereign (UK) Ltd., at sdenton@SovereignGroup.com