Limited Company Buy To Let

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Limited Company Buy To Let Mortgages

Gary from The Mortgage Brokerage joins the Mortgage and Protection podcast to discuss limited company Buy to Let mortgages.

What is a limited company Buy to Let mortgage?

This is a mortgage you can use to buy investment properties as a limited company instead of in your own name. This is a potentially cheaper approach for some landlords, as taxation laws have made letting properties more expensive.

When you’re setting up a limited company, it is important that you speak to a broker and accountant to make sure that it’s right for you. You need to understand the potential expenses you could incur with a limited company as well as the tax benefits.

How can a limited company get a Buy to Let mortgage?

In most cases, your application will be assessed as if you were purchasing the property in your own name, meeting the lender’s criteria as both a limited company and as an individual.

On the plus side, you can actually set up a limited company and apply for a mortgage on day one. So the company does not have to have been trading for a certain period of time.

How does a limited company Buy to Let mortgage work?

Setting up a limited company is essentially a form of ‘tax wrapper’ The lender will still want a personal guarantee. The days have gone where you could set up a limited company, get a mortgage, and then if something goes wrong, you close the company down. Today, that mortgage is still in your individual name so if you default or the property is repossessed, the lenders will come after you.

Do limited companies pay stamp duty on Buy to Let?

Yes. The rules are the same for both personal and limited company Buy to Lets  – there is a 3% surcharge on standard stamp duty levels. It’s best for any potential landlords to visit the HMRC website and use the stamp duty calculator to work out the potential fee on their Buy to Let property.

Should I put my Buy to Let into a limited company?

It depends on your situation. For some people it’s the right choice, for others, it doesn’t make financial sense. You have to factor in individual circumstances: are you looking to purchase one Buy to Let property or a large portfolio? Are you a higher rate taxpayer? What’s the end game – to sell the property for a profit, or are you looking at succession planning?

It’s really down to the individual, so it’s important to speak to a broker that specialises in Buy to Let and put a plan in place on day one, and see what the goals are for five, 10 years time. That way you start out strongly and stay on track.

Is it better to own property through a company?

Again it depends on your goals. You should speak to a tax accountant to make sure that it’s right for you – we cannot give tax advice. There are various further things to look at too: interest rates, because interest rates for limited companies are more expensive than a personal mortgage. You also need to look at legal arrangement fees and all the details.

So, again, sit down with an expert who will do a fact find and make you aware of the pros and cons of each approach.

Can I transfer my Buy to Let property to a limited company?

Yes, but talk to your accountant as you may need to pay stamp duty again. Plus, you need to see whether any extra fees will be worth the income tax saving in the long run.

When you transfer your property portfolio into a limited company, it is treated as a purchase by mortgage lenders. The good news is that the lenders can use the equity in the property as a deposit.

The bad news is you will have to apply to a specialist company Buy to Let lender for a new mortgage on each of the properties. You cannot simply keep the mortgage and change the ownership because you’re no longer buying as an individual.

So you will potentially have all the same charges as you would when purchasing a property brand new: solicitor costs, evaluation fees, lender fees and then a more expensive interest rate. There are a lot of things to factor in.

Are Buy to Let mortgages for limited companies more expensive?

Buy to Let mortgages for a company are around one to one and a half percent more expensive than when you purchase in your own name.

You’ll also find that lenders’ fees: valuation fees, legal costs may be a little bit higher – as an individual you often find you’re offered free legals, but this generally doesn’t apply on a limited company mortgage.

How do I set up a limited company or a Special Purpose Vehicle (SPV)?

You will need to formally register your company at Companies House. You specify the company name, its registered address and registered directors. It can be an existing trading company or more commonly a Special Purpose Vehicle, which is set up with the specific purpose of holding property. Many lenders will only lend to an SPV.

Many lenders will also require you to have set up the business with an SIC Code.

For Buy to Let you should use one or more of the following SIC codes:

68100 – BUYING AND SELLING OF OWN REAL ESTATE

68209 – OTHER LETTING AND OPERATING OF OWN OR LEASED REAL ESTATE

68320 – MANAGEMENT OF REAL ESTATE

68201 – RENTING AND OPERATING OF HOUSING ASSOCIATION REAL ESTATE

By having an SIC code you will have access to all the available lenders.

What are the criteria for a limited company Buy to Let mortgage?

Lenders will require that you provide a personal guarantee to repay the mortgage in full. The lending is written based on a shareholding director within the company. On top of that, normal lending criteria policy will apply, i.e. you need to meet a minimum income, have good credit and, very importantly, you need to meet rental stress tests. Speak to a broker to make sure you meet the criteria before you apply.

What documents are needed when applying for a limited company Buy to Let mortgage?

Ideally you will need proof of incorporation and your SIC codes. Then you need proof of income. If you have a standard job, that means supplying payslips. If you’re self-employed it usually means providing two to three years’ tax records.

You will also provide bank statements and proof of your deposit. Some lenders might ask for further information too.

What deposit do I need for a limited company Buy to Let mortgage?

Ideally you need a minimum of 25% to get a competitive rate and have access to most lenders. We do have a few lenders who will accept a 20% deposit as long as you meet their lending criteria.

What we say to clients is that the bigger the deposit available the better, as it reduces the monthly repayments – meaning that you gain a bigger profit on the rent.

Can you borrow more with a limited company Buy to Let mortgage?

Unfortunately not. With Buy to Let, the most important things are to have a 25% and to meet the stress test on the rental income – that’s what will dictate how much you can actually borrow.

We have some clients in London who have properties worth several hundred thousand pounds that have failed the stress test. The stress test requires you to generate a rent worth 125% of each monthly mortgage payment. On some high value properties that means the rent will be too high to attract a tenant.

What are some of the advantages and disadvantages of a limited company Buy to Let?

A key advantage is tax relief for higher rate taxpayers. A few years ago you could offset interest payments and expenses from your tax on a mortgage in a personal name. Now, HMRC allows a tax credit, but this is limited to 19%.

For higher rate taxpayers this means higher tax bills  – and being taxed on something that they haven’t actually profited from. Whereas with a limited company the interest payment expense is still fully allowable.

Also, a limited company will pay no income tax on the retained profits, allowing more cash to be reinvested in the company. On a personal mortgage you are taxed on the income and profit.

Corporation tax is 20%, which means the tax liability is reduced compared to the higher rate taxpayers on 40%. Plus, as your income from the business is controlled by you, there’s an opportunity to reduce the personal income tax liability.

Having a limited company makes it easier to change property ownership – the company’s shareholders can be changed at any time.

One of the disadvantages is that there is no capital gains tax allowance with a limited company. With a personal mortgage, if you want to sell a property you can offset it against your personal allowance. Whereas with a limited company you don’t get that.

There are also higher legal costs for conveyancers, extra transaction fees and personal guarantees must be given by all directors.

How much does a limited company buy to let property cost?

An exclusive rate at the moment is 2.7% with the cashback for purchases below 75% loan to value, which is a fantastic rate.

Generally speaking about 3 to 3.5% is a typical rate, on a two year fixed, five year fixed mortgage.

How can the Mortgage Brokerage help?

Give the office a telephone call or email us via our website, and have a chat with us. We specialise in Buy to Let – and we’ve even had clients who haven’t ever been a homeowner.

We offer a free, no obligation consultation. We can talk about all the pros and cons of being a landlord and how best to achieve your goals. We’ve helped clients build a portfolio and do it right, without overexposure. A lot of landlords keep borrowing and borrowing which means they reduce the overall Loan to Value and equity in their portfolio. Many lenders now want portfolios with at least 35% equity overall.

This is where we’d be able to help clients – advise them to slow down if needed, or to increase the rent on a certain property. It’s an area where we have a lot of experience and will really help you make a success of your Buy to Let business.

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