BTL mortgages for limited companies - everything you need to know

Investing in buy to let properties has been on the increase for a number of years and recent tax changes have encouraged many to look at the possibility of creating a limited company as an appropriate structure for the enterprise.

Limited companies benefit from the lower rate of corporation tax as opposed to income tax charged on earnings generated from rental income and are thus favoured by investors.

If you are engaged in the buy to let market, or are thinking of entering it, then seeking advice from a buy to let adviser will be your first port of call. Our specialist advisers will be able to provide information on using a limited company or a Special Purpose Vehicle (SPV). The latter is a company set up for the sole purpose of buy to let by a private individual or existing company, covering the purchase or re-mortgage of residential properties for letting.

Expenses and fees

Using a limited company or SPV is an attractive option, offering significant tax savings which outweigh the expenses and fees of setting up the company and filing its accounts. This kind of model will also mean that you will be able to grow your portfolio quickly and in a tax-efficient manner. Changes to tax relief legislation mean that more landlords are looking at using a corporate vehicle to purchase property. Currently, corporation tax is set at 20% but is due to fall to 17% by 2020.

In the past, sourcing a buy to let mortgage may have proved difficult but now banks are increasingly keen to finance these operations.

The majority of lenders will expect your limited company to be set up as an SPV but some lenders will deal with currently trading companies. In looking for a buy to let mortgage, you will need to clarify your set-up with your buy to let mortgage advisor.

There is little doubt that lending to landlords who have formed limited companies to manage their investments has increased dramatically over the past few years. The peak was in the first months of 2016 before the Stamp Duty surcharge was introduced. The 3% addition to Stamp Duty Land Tax applies to purchases of additional residential properties and was part of the Government’s Five Point Plan, focusing on support for first-time buyers and aimed at creating low-cost home ownership. This has had a significant impact on the buy to let market, but lenders have responded accordingly.

Lower tax exposure

The change in the market has meant that an increasing number of landlords are incorporating and moving their holdings to lower tax exposure. Consequently, loans to limited companies are on an upward curve. Not only has availability increased but rates have dropped, driven by the growth in high street banks’ interest in the buy to let mortgage sector.

Where previously rates of close to 5% applied to these loans, they have been halved in some cases, depending on the size of the deposit offered by the purchaser. This reflects the stricter affordability criteria applied by the lender and so for most landlords, the interest gap is narrower, but with a significant lump sum deposit good deals can still be struck and our mortgage advisers will be able to discuss these with you.

The Bank of England’s stress rates will also impact the lender’s ability to provide an affordable deal. Indeed, many have adjusted their rental cover ratio, the amount of income the landlord must take from rental income over and above mortgage payments which fall due. Significantly these apply to limited company operations as well as to private landlords.

At the same time as the Bank’s actions, the Prudential Regulation Authority has also reviewed underwriting standards in relation to buy to let mortgages. Consequently, firms they regulate have been asked to take a prudent line in lending to avoid the potential of excessive losses. This has resulted in tighter checks on the affordability of buy to let applications.

Corporate structure

All of this means that whilst mortgages are more accessible, they are subject to rigorous checks by the authorities. Even so, the good news is that our mortgage advisors will be able to work through these issues and find an appropriate lender.

The availability of a loan will depend upon your corporate structure. You may have an existing company or be about to set up a new vehicle for your investment.

If you have an existing company but do not currently invest in buy to let properties, getting a loan could be difficult unless you set up a specific subsidiary. Even so, there are some lenders who offer loans, mainly seen as corporate facilities. A larger deposit may be required as the number of lenders is limited. Setting up a new SPV will open up more options, many of which may be available at a lower borrowing rate and our advisors will be able to help you to understand the choices available.

Companies classified as SPVs, dealing solely in rental properties, have many more options available to them when it comes to financing property. Given the niche nature of the financing, you will be best advised to deal with a specialist broker such as The Mortgage Hut.

Setting up a new company

If you are setting up a new company for your purchase, lenders will normally look at an 85% Loan to Value calculation and check your potential rental yield. Company directors will also be subjected to a credit check as the company itself, as a new entity, will have no creditworthiness. This may mean that the lender will seek personal guarantees from the directors, rendering them responsible should the company fail.

If you already own rental properties in a private capacity, you may wish to consider creating a limited company to hold your assets and take advantage of the tax differences and write off options. However, the operation will involve a re-sale and purchase with associated legal costs, capital gains tax and stamp duty. You will have to run the calculations past your accountants before making this kind of decision.

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