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IPSE: Contractors to look to limited companies for buy-to-let

Tuesday 2nd February, 2016
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Limited Company
Investing in property through a limited company can be beneficial for contractors, as it can be purchased without the need to draw a dividend, while saving a considerable amount of tax upfront, according to IPSE.

As long as the borrower decides to set up a limited company for the sole purpose of holding investment property, either as a subsidiary of, or a branch of a contractors limited company, 100 per cent of the mortgage interest can also be offset for tax purposes.

The idea of moving buy-to-let investments to limited companies has become increasingly popular following George Osbornes plans to cut tax relief for landlords.

Under the recent legislation, those buying a property to rent out will no longer be able to offset 100 per cent of the mortgage interest for tax purposes.

They will also be forced to pay an additional three per cent of stamp duty on investment property, adding on average of over £6,000 to landlords investment property purchase costs.

The full details of the tax cuts will be revealed by Mr Osborne in the March Budget announcement, when the full impact of the buy-to-let market will become clear.

Despite this, key drivers of tenant demand remain entrenched. For example, for personally owned buy-to-lets, the deposit must be from the borrowers own funds which usually require a dividend and are taxable.

Rental profits are subject to the borrowers highest rate of income tax and the mortgage interest is subject to an additional 20 per cent, or 25 per cent, for higher rate and additional tax payers.

There is also potential capital gains tax on sale which has caused many to think outside the box when investing in buy-to-let property, according to IPSE.

Simon Butler, senior mortgage consultant at Contractor Mortgages Made Easy, said: Setting up a Special Purpose Vehicle (SPV) for investment property was very rarely used by contractors as many simply wouldnt think of this strategy, and those that do simply dont have the access to mortgage borrowing in this way.

However, contractors have become interested in how this can possibly help maximise net returns as many look to invest the large surplus funds within their company as a deposit, meaning they get hit twice with the new dividend rules in order to take the funds out of the company, and then again in purchasing their investment property.

For contractors, the key advantage is that those setting up SPVs in this way can transfer the deposit from retained funds to their SPV with without being hit by tax.


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