If 2016’s changes to stamp duty and Buy to Let (BTL) mortgage interest tax relief have made growing your portfolio more expensive, you may have considered registering as a limited company. As a limited company it is possible for landlords to avoid losing out on tax relief. While limited companies have their own pros, cons and costs to weigh up, many individuals working with property are now choosing to change their approach and register in this way. That is where limited company Buy to Let mortgages come in.
In reality, a Limited Company Buy to Let Mortgage is almost identical to a regular BTL mortgage which you may have used as an independent landlord. The crucial difference lies in how lenders appraise your suitability for your loan. Many high street mortgage providers are less willing to lend to limited companies, as they perceive them as riskier prospects. As many “limited companies” seeking this type of loan are in fact self-employed landlords, the chances of business failure are viewed as more significant. This can make sourcing a limited company Buy to Let mortgage a potentially trickier process.
Fortunately, as the numbers of landlords choosing to register as limited companies rises, so too do the number of mortgage options and providers available to them. These lenders will look far beyond the basics of your limited company business, instead delving into details including your personal financial history and your personal income situation, in order to gain a true picture of your suitability for a mortgage.
In recent months, specialist brokers have seen a surge in the number of applications for Buy to Let mortgages from limited companies as landlords look for a way around the changes. Investors are increasingly using corporate structures to access loans due to the tax efficiencies associated with this approach. This is particularly the case for higher rate tax payers, or those who have been tipped into the higher tax bracket by the recent changes.
The option to purchase a Buy to Let property using a Ltd Company is open to anyone, subject to the specific current criteria of a lender. As a more specialised way of buy a property, the choice of lender and mortgage deals may be more restrictive than the options available for a personal Buy to Let.
There is very little difference in the general lending criteria and requirements by lenders, regardless of whether the property is being purchased in a personal name or through a Ltd Company. The property and rental yield are assessed in the same way and the maximum loan available will range between 75% and 85% depending on the actual or anticipated rent. The Ltd Company must be set up with a specific SIC (Standard Industrial Classification) code which will stipulate that the company cannot perform any activities other than buying and renting property. Typically, the codes used will be;
The main advantage to be gained is in relation to tax efficiency, as mentioned above. While any money you draw out of the business will be taxed at the prevailing rate, by leaving money in the business and using it to renovate, refurbish or expand your portfolio, you will pay the lower rate of corporation tax.
Our article on the benefits of limited company buy-to-let explains in more detail why this approach might be more advantageous for some buy-to-let landlords in the coming years. In summary, recently announced changes to tax rules mean that landlords will only be able to claim tax relief for mortgage interest at the basic rate (20%) even if they are a higher rate (40%) or additional rate (45%) taxpayer, which could have a profound effect on some landlords’ overall yields. By running your buy-to-let business via a limited company structure, it may, therefore, be possible to minimise your tax liabilities.
There are other implications to consider – for example with regard to capital gains tax when a property is sold – so it’s important to speak to a chartered accountant or specialist tax adviser about your longer-term plans for your property portfolio before deciding to set up a limited company. Whether you opt to run your business on a personal or limited company basis, it’s advantageous to make your decision at the outset, as restructuring your business later on can attract additional costs in transferring the ownership of properties from personal to company ownership (or vice versa) in terms of both legal fees and tax liabilities.
A Buy to Let Mortgage for a limited company may be slightly more complicated to set up. However, by undertaking a full review and discussion of your current situation and objectives, we should be able to source and process an application for you.
Mortgages for Ltd Company Buy to Let investment properties are not widespread in the mortgage market, and not all lenders are happy with to accept applications on this basis. This means that potentially, interest rates may not be as attractive as those available for mortgages in a personal name.
Additional running costs will include the preparation of accounts, company / corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable. Your accountant may also charge higher fees when preparing accounts for a Limited Company.
A SPV is created to be tax-efficient way of landlords holding any number of Buy to Let Properties. The term SPV is a term used in the mortgage industry for a limited company specially set up to buy to rent properties.
As such, it is Limited Company with restricted trading.
The short answer is yes – anyone can set up a new special purpose vehicle to purchase a buy to let property. However, you need to be sure that this is in fact the most suitable strategy for you and a discussion with one of our Buy to Let specialists will help with your decision. You should also consult with your accountant and possibly take legal guidance to see if an SPV is suitable for your own situation.
Provided the new special purpose vehicle is created with an acceptable SIC (standard industrial classification) code, the Company should be suitable for mortgage lenders to consider an application.
At the stage of a mortgage application, the directors will be subject to credit scoring to show that the company is creditworthy. At the creation of the company, it will have no trading or credit history of its own. The lender will also need proof of the director’s income to establish a level of underlying affordability.
In Buy to Let terms, special purpose vehicles (SPVs) are, as the name suggests, limited companies which exist only to hold the property and as a structure to channel the income and expenditure of your Buy to Let business. Like any other limited company, you can draw income and dividends from the company structure, while profits retained within the company could, for example, ultimately be reinvested into expanding your property portfolio.
If your Limited Company receives income from any business or assets other than your Buy to Let property, then it would be considered a trading company. It’s important to be aware that most Buy to Let lenders will only lend to SPV limited companies, as the inclusion of other business channels and income streams via the company structure arguably introduces an element of risk. There are, however, some more niche lenders who do offer Buy to Let mortgages to trading companies.
An SPV may be an already existing trading company which will now only be used for your Buy to Let business, or it can be a new company with no prior record of trading; some lenders prefer the latter as it eliminates any potential risks (however unlikely) associated with the company’s prior trading activity.
Assessment criteria for limited company Buy to Let mortgages can vary from lender to lender; the personal financial history of the company director(s) will often be taken into account, and lenders usually require the director(s) to personally guarantee the debt.
Setting up an SPV – or buying an existing limited company to use as an SPV going forward – is surprisingly straightforward and inexpensive. In most cases you can incorporate a limited company online; it currently costs only £12 and registration with Companies House usually takes 24 hours to complete. Alternatively, your accountant can arrange to register the company on your behalf.
Your company will also need a SIC (“standard industrial classification of economic activities”) code, which specifies what type of business the company conducts. Most lenders will require your SPV to have the correct type of SIC registered, specifically relating to property letting – Companies House lists these under section L (“Real estate activities”).
While using a limited company to apply for a Buy-to-Let mortgage and run your property portfolio may grant you certain tax-efficiencies, it unfortunately does not exclude limited company owners from credit checks by mortgage lenders during their assessment for their decision to lend. However, this said, the criteria for obtaining a Buy-to-Let mortgage under a limited company while you have a bad credit record is no different to that for a personal application, and it is indeed possible that you will be able to get the mortgage you need.
The process might be a little more complex and you might need to do more legwork, such as providing supporting documentation to show that despite any issues in the past, you are now on a secure financial footing. Mainstream lenders tend to shy away from working with anyone with blemishes on their credit record, especially for a Buy-to-Let mortgage, which is seen as a greater risk. So, you are likely to need to approach a specialist lender who will take a broader view of your circumstances. They’ll apply their own individual criteria and consider your current finances, future projections and more recent credit history rather than make their decision solely on an automatically generated credit score.
While any bad credit on your record will have an impact, the nature of the adverse credit event and how long ago it occurred will be important. A few missed store card payments three years ago will carry far less weight than a mortgage default in the last 12 months, for example. However, if you can meet all the lender’s other criteria, and perhaps provide a larger than usual deposit, then your application should have a good chance of success. If you contact one of our specialist Buy-to-Let or Bad Credit advisors, they will assess your circumstances and recommend options that will best suit your needs going forward.
Interest rates for Ltd Company Buy to Let Mortgages will vary from lender to lender. Although this area of the market is growing, the choice of lenders rates is less than for personal Buy to Let applications. Rate will depend on the size of the mortgage in relation to the property value and also on the term of any fixed rate period.
Rates are constantly changing as the market moves and more lenders become involved. By undertaking a full review of your circumstances and objectives, our expert Buy to Let advisers will be able to find the best rate options for you.
Lenders offering Ltd Company buy to let mortgage deals tend to operate in a very niche marketplace and can generally be sourced only through a mortgage broker or intermediary. The number of lenders is steadily growing and this type of mortgage is developing into a recognised acceptable option for landlords.
Buy to Let mortgage advice is a very specialist area which includes Ltd Company mortgage arrangements. The list of lenders operating in the Ltd Company arena is steadily growing and there are many lenders whose names may not be instantly recognisable but are nevertheless major players. These lenders tend to only accept applications through mortgage brokers and intermediaries.
At Just Mortgage Brokers we have a team of specialist advisers with access to the whole of the market. Discuss your needs with us in detail and you can be confident that a suitable lender and mortgage deal can be found for you.
When you apply for a limited company buy-to-let mortgage, most lenders require that your limited company be registered with an appropriate SIC (Standard Industrial Classification of Economic Activities) code for property letting. There are four SIC codes that can potentially relate to property letting:
68100 – Buying and selling of own real estate
68201 – Renting and operating of Housing Association real estate
68209 – Other letting and operating of own or leased real estate
68320 – Management of real estate on a fee or contract basis
Lenders can differ in their requirements, but typically buy-to-let lenders will expect a limited company to be registered under either;
68100 – Buying and selling of own real estate or
68209 – Other letting and operating of own or leased real estate.
To minimise risk, most buy-to-let lenders prefer a limited company that exists as a special purpose vehicle (SPV) exclusively to buy, rent and sell buy-to-let property, without the complications of any other trade or revenue streams being conducted through it. In the vast majority of cases, this means a newly incorporated limited company solely dedicated to your buy-to-let business and with an appropriate SIC code for property letting.
If you do have an existing limited company with a trading history, some lenders may be willing to accept it, but normally on the condition that no other trade or revenue streams – other than the buy-to-let business – will go through the company going forward. A very small number of lenders will accept an existing limited company with other revenue streams in addition to the buy-to-let business, but you should be aware that this has the potential to limit your mortgage options.
There is no limit to the amount of properties you can hold within a limited company. In fact, operating as a limited company, as opposed to running a buy-to-let business on a personal basis, can be more advantageous for landlords with a portfolio of several properties, due to the potential tax efficiencies it affords.
Some lenders do not require a limited company to be incorporated before you apply for an Agreement in Principle. However, you will likely be better placed if this has been done.
You can transfer buy-to-let property that you own personally to the limited company. However, this effectively means selling the property as an individual, and purchasing it via the limited company – which can leave you personally liable for capital gains tax on the sale, and the company liable for Stamp Duty on the purchase. It is therefore important to weigh the pros and cons of transferring a property before proceeding and we recommend you seek professional advice in regard to your tax affairs prior to making any decisions.
