Why Buying In a Company Name May Be Better
First things first, this is not about which way is better from a tax point of view.
2017 will see new affordability calculations introduced across the industry, these new regulatory guidelines are being phased in in two tranches during January and September.
What these mean is that the income ratios that lenders use when working out you can borrow to purchase or remortgage investment property will suddenly become a lot tighter and will reduce the amount a lot of landlords can borrow.
For property investors who are used to working on income cover of 120% or 125% these new rules may come as a bit of a shock.
With lenders now having to stress test at a much higher interest rate and seek a much higher level of rental cover it will suddenly reduce how much landlords can borrow and for those with existing loans due to renew over the next 24 months landlords could find themselves in a position where their rental incomes no longer stack up and remortgaging suddenly becomes a lot harder.
This is where borrowing in sole names or as a limited company really comes into its own.
Again, this is not about the differences in tax or stamp duty. This is about how lenders are able to view affordability and how it differs between personal ownership and limited company ownership.
One of the leading investment property lenders recently announced their rental cover ratios for 2017 which account for the changes being introduced.
Let me show you the difference in rental ratios between borrowing in your personal name or as a limited company as this will show you just how different things are viewed.
This means that a property investor who has five or more properties will need to show that the rental income to loan costs ratio is 155%. A limited company doing the same thing would only need to show a ratio of 125%.
Potentially this means that landlords and property investors who have loans renewing over the next two years and have borrowing in their own name could find that the only realistic way of remortgaging what they already have is to put that borrowing into limited company names.
Whilst this is not as straightforward as it sounds there is precedent which says that providing the new limited company has the same ownership as the property in question then ownership of a property can be moved from sole to limited company names without incurring stamp duty.
As always if this is something you are considering doing then please do take some good legal advice. The case law in question is ‘Ramsay vs HMRC 2012’, please do talk this through with your legal advisers and discuss the case with as you see fit.
Why The Difference?
One of the questions that often gets asked is ‘why is the way in which limited company loans are judged so different from those in personal names?’ In a purely sensible and logic driven world that is a very good question however as with all things financial logic is commonly superseded by regulation. This is what is happening here.
The way that personal borrowing is regulated compared to limited company borrowing means that lenders have a far greater degree of interpretation and flexibility when it comes to lending to limited companies hence why we see the requirement for lower income ratios on company borrowing compared to personal borrowing, even when the proposition itself is fundamentally the same.
Our take on investment property lending, certainly over the next 24 months, is that more than ever the borrower carefully considers how they structure their funding. This is not just about fixed or variable interest rates, it is about the ownership and how that structure impacts on the availability of borrowing.
For many property investors the next few years already offer a great deal of uncertainty and concerns over the availability of funding is something that many investors just don’t need.
For those with deals expiring in 2017 or 2018 then please give yourself time to look at the options early and take advice on the best route for you.
If you have any questions about how to fund investment property going forwards or you want to talk through what your options are on deals that are expiring then as always please do get in touch on 01293 541333 or 0207 866 2102.
By Dave Farmer