A large number of property investors are moving away from owning their properties personally to ownership via a Limited Company. A Ltd. Co can own any number of properties and can provide a range of benefits depending on your circumstances.

Here we provide an overview of how limited companies can take out a buy to let mortgage for property investment.

Can a Limited Company take out a mortgage?

Lenders are willing to provide buy to let mortgages to Limited Companies. However, they do not like lending to trading businesses for property investment purposes and prefer SPV’s so that assets are liabilities are easier to see and control.

If the Company receives income from normal business activities, not solely property letting, then they are unlikely to lend as this is a trading company, not a SPV.

Why are some landlords incorporating their buy to let business?

Buying a property through a limited company may offer attractive financial benefits to some landlords – for example, higher rate taxpayers who have a portfolio of properties may find it more tax-efficient to own them within a limited company. Established landlords who have a mixed portfolio of commercial, residential, HMO and Multi-Unit Freehold Block (MUFB) often prefer to keep these within a company structure.

It is important to note, however, that even with tax savings, a limited company landlord may end up worse off financially. That is why it is essential to seek independent, professional tax advice.

What stimulated the move to incorporation?

This move towards incorporation was stimulated following the decision of the then Chancellor George Osborne in 2015 to phase out tax relief for landlords on mortgage interest repayments.

In an article dated the 30th of October 2019, consultants BDO explain that, with effect from the 1st of April 2020, landlords will only be able to claim income tax relief on mortgage interest repayments at the basic rate of 20%. Taxpayers on the higher or additional rate of income tax are then taxed on their buy to let income at 40% or 45% respectively.

If your buy to let properties are transferred to a limited company, however, your corporate profits are subject only to corporation tax.

Can I save money by forming a limited company for my buy to let business?

Even if you are paying income tax at the basic rate of 20%, your tax liability reduces once the properties are transferred into a limited company – and if you are paying income tax at the higher or additional rate, the savings might be substantial.

However, it is also important to consider the costs involved – both in setting up and managing the company (e.g. legal fees, accountancy fees, Corporation Tax and so on) and the implications of the transfer of the properties you currently own into a separate legal entity, the SPV company.

Probably the most significant implication on that transfer to new ownership is the likely need to remortgage your buy to let property and seek a specialist SPV  limited company buy to let mortgage.

You might need to offset the cost of raising any additional cash to finance the remortgage against any potential tax savings.

You should always speak to a qualified accountant about any potential tax benefits or liabilities.

What benefits can a Ltd company mortgage offer?

There are potentially several benefits, including it is typically easier to expand your portfolio and, future proofing.

Expansion

Expanding your portfolio requires capital funding. The retained profits within the company are a potential source for that. Retained profits are typically protected from personal tax liabilities due to the fact you personally are not making a capital gain.

It is the legal entity, your business, that has made the profit. That means potentially more retained capital is available as a source for future portfolio expansion funding.

Future proofing

Things change, and if they need to, you’ll appreciate simplicity and flexibility.

It’s typically easier to change registered ownership of a limited company than to try and do the same with privately held property. The reason is that with a company, the property’s ownership does not change. That’s important if you are seeking to insulate the transaction from Inheritance Tax, as well as Stamp Duty and CGT.

All these things are attractive if you’re considering possibly transferring your business to your family at some time. (Please let your mortgage advisor know if this strategy forms part of your future plans).

What else do I need to think about if I am considering incorporation?

You will have limited liability, but …

One of the fundamental reasons for owning a limited liability company is that, typically, you’re not personally liable for the company’s debts. That applies to losses on buy to lets.

Do keep in mind though that you may be bound by liabilities arising from any personal guarantees you offered your mortgage provider in support of your application.

You will lose your Capital Gains Tax allowance but …

Where a limited company sells a property, there is no capital gains tax allowance. By contrast, if an individual sells a buy to let, they’ll typically receive an allowance – in other words, a sum considered outside of CGT levies.

How much that entails will depend upon the year they sold the property. For sales in the 2021-2022 tax year, the Capital Gains Tax allowance is £12,300.

CGT would apply to any sum above the allowance.

However, CGT isn’t payable on buy to lets owned by limited companies. Instead, the company would be liable for Corporation Tax without an allowance.

Paying Corporation Tax may prove to be more cost-effective but would vary depending upon the profits made from the sale of the buy to let.

Is it easy to get a limited company buy to let mortgage?

You may find that when buying a property through a limited company, you have less choice in terms of lenders and mortgages than if you are looking for a traditional buy to let mortgage.

Buy to let limited company lenders may also apply slightly higher interest rates and fees in situations where they are lending to limited companies than might be the case when the applicant is a private individual seeking buy to let mortgages.

They will of course take a first (fixed) charge over each property being mortgaged. They will also ask for personal guarantees from the directors and/or shareholders.

This enables a Ltd company mortgage to be granted to new SPV companies without any trading history or accounts.

To qualify you should also be a property owner, have a regular income and a good credit profile.

At Drake Mortgages, we work with specialist lenders who offer buy to let mortgages via a limited company, meaning we can find the most appropriate and cost-effective solution for you.

What about holiday let mortgages?

There may be advantages to holding holiday lets within an SPV company and you should always seek professional advice prior to any purchases.

Holiday Let Mortgages for Limited Companies are available with a good choice of lenders.

Remember that a holiday let that qualifies as a Furnished Holiday Let (FHL) can take advantage of special FHL tax breaks without the need for an SPV.

How big a deposit do I need for a limited company buy to let mortgage?

The deposit you need is determined by the lender’s assessment of the maximum loan to value (LTV) ratio of the advance – the size of the mortgage advance in relation to the value of the buy to let property you are buying.

That assessment naturally takes into account a host of factors – principally aimed at determining the affordability of the mortgage loan with respect to the financial standing of your company. For example, a credit check on your company’s past management of previous credit and borrowing; the length of time you have been trading as an SPV; and, the audited accounts of your company.

If your company manages to score highly on all such factors, a mortgage lender may be prepared to advance a loan to value mortgage as high as 85% – in other words, you may need to put down a mortgage deposit of as little as 15% of the property’s purchase price.

If there are less favourable factors to be considered – your limited company is not an SPV, for example – the number of lenders interested in granting a mortgage is smaller, and you may be offered an LTV of only 75% or less.

How to set up a Special Purpose Vehicle (SPV) Company

Before you rush off we would always recommend speaking with your tax adviser first.

New companies can be set up in a few different ways. Your accountant should be able to help, there are also company formation agents or you could just do it yourself!

• First you will need to decide on a name for your SPV. This cannot be the same as a company that already exists. You can search existing registrations at Companies House
• Then you need to incorporate it or register it with Companies House. You can do this yourself online which should be OK if the ownership is fairly simple. However, if you have investors or partners then we would recommend speaking with your accountant first about the right structure for your situation
• You will need to provide the full names and addresses of the shareholders and company directors involved
• SIC Code – This is part of the registration with Companies House and provides a description of your company’s type of business
• You also need to register with HMRC for corporation tax within three months of incorporating. Your accountant can help with this if needed