The fine margin between profit and loss

As you’ll no doubt know, mortgage rates have rocketed in the last few months. And there’s no getting around it – this makes it harder to turn a profit from your property investments. But the story isn’t all doom and gloom. With the right approach, great profit is still possible. And it starts with a limited company.

Right now, as mortgage costs soar, a limited company could be the one thing that’ll keep your portfolio in the black. Let’s explore why.

The difference in numbers

The latest Hamptons data shows that more investors than ever are turning to limited companies in the face of growing mortgage costs. To understand why, just look at the numbers. 

For the following example, we’ve made a few basic assumptions:

• The investor is a higher rate taxpayer (40%)
• The property cost £300,000
• The mortgage is £225,000 (a 75% LTV)
• The difference between personal and company mortgage rates is 0.5% (5.5% for personal name, 6% through a limited company)
• Gross yield is 6%
• Gross rental income is £18,000
• Investor uses GetGround to handle your company’s accounting (just £19pcm + VAT)
• No accounting costs for personal ownership
• Operating costs – like Ground Rent, service charges and property management – are 10% of rental income.

This clearly shows that, today, a limited company can be the one thing keeping your investment profitable. This explains why more investors than ever are turning to this structure – for many, investing in their personal name is just no longer an option.

Won’t rental growth save the day?

Sure, rents have increased in the past few years. But Hamptons data shows that rental growth will only absorb about a fifth of the new mortgage costs. What’s more, rental growth seems to be slowing – and national averages are skewed by massive increases in London (where they rose 11.3% year-on-year, and 26.1% in Inner London).

This would suggest that simply raising rents won’t do enough to make up for those rocketing mortgage costs.

The capital appreciation question

Most investors are in property for the long-term as well as the short. So you might see rising mortgage costs as a bump on the road towards capital appreciation. Maybe you’re prepared to swallow some immediate pain for long-term gain.

But a limited company can help you here, too. Because, when you sell a property wrapped in a company, there are serious tax advantages on offer:

1. If you sell the shares in the company, rather than the property itself, you’ll pay a reduced rate of Capital Gains Tax (10% or 20%, depending on your Income Tax bracket). This is an 8% saving on what you’d pay in CGT (either 18% or 28%) if you sold in your personal name.
2. If you sell the property out of the company, you’ll pay no CGT at all – only Corporation Tax. This will be lower than 28% – perfect for Higher rate taxpayers. 

Also, if you sell shares in your company, the buyer won’t need to pay SDLT. This creates a price advantage, as other properties on the market usually will incur SDLT. In this instance, you can create a win-win scenario – where you increase the sale price slightly (essentially splitting the SDLT difference), and the buyer still gets to enter the market with a lower up-front cost, as there’s no SDLT to pay.

Note: Buyers will need to pay the (much lower) Stamp Duty Reserve Tax (SDRT). But, at 0.5%, this still means a considerable saving.

Efficiency is key

Let’s be clear – however you invest, you’re unlikely to turn a life-changing monthly profit right now. But, even so, it pays to keep your investment as efficient as possible. A limited company can help you weather these choppy waters, until calmer seas (and mortgage markets) prevail.

To learn more about how a limited company could set your investment up for success, book your free consultation.

This is for your information only – you shouldn't view this as legal advice, tax advice, investment advice, or any advice at all. While we've tried to make sure this information is accurate and up to date, things can change, so it shouldn't be viewed as totally comprehensive. GetGround always recommends you seek out independent advice before making any investment decisions.