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Liquid Expat Mortgages Guide

Limited Company Buy To Let Guide

 

This Limited Company Buy To Let Guide has been produced for information purposes only. As a mortgage broker, we’re not able to offer tax advice.

Until 2015, there was no real advantage to owning a property in a company as opposed to owning it in your own name. However changes to the treatment of mortgage interest introduced after the 2015 budget made the Limited Company route far more appealing for anyone buying a second property.

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Why set up as a Trading Limited Company or SPV?

Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability however from 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax which is currently 20%.

What’s more relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. This means that your taxable income will rise, especially if you’re a higher or additional rate tax payer.

limited company buy to let guide

Contact Liquid Expat Mortgages


Limited Company Buy To Let Guide

This Limited Company Buy To Let Guide has been produced for information purposes only. As a mortgage broker, we’re not able to offer tax advice.

 

Until 2015, there was no real advantage to owning a property in a company as opposed to owning it in your own name. However changes to the treatment of mortgage interest introduced after the 2015 budget made the Limited Company route far more appealing for anyone buying a second property.

 

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Why set up as a Trading Limited Company or SPV?

Up until the 2016/17 tax year, landlords could deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability however from 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax which is currently 20%.

 

What’s more relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. This means that your taxable income will rise, especially if you’re a higher or additional rate tax payer.

 

limited company buy to let guide

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What is an SPV?

A Special Purpose Vehicle (SPV) is a non-trading Limited Company incorporated at Companies House as a Buy to Let Holding Company. It exists solely for buying, selling and letting property. It’s simply a company which has a “Special Purpose” of owning and renting out property.

 

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 however your limited company (LTD) – whether existing or newly set up – receives income from any business or assets other than your buy-to-let property, then it would be considered a trading company.

 

An example of someone who uses their SPV limited company to invest in property is a recruitment consultant who sets up a UK limited company from which to run his recruitment/headhunting consultancy. Separately, he also sets up an SPV limited company in which he exclusively buys, sells and rents out buy to let property. The operation and income of both companies are separate any for tax and accounting purposes.

 

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What is a Trading Limited Company?

A trading limited company is a legal structure set up to run a business. It is a “separate legal entity” which obtains finance to purchase the property in the company’s name. So the Company owns the Property, but you will hold the Company based on the % of shares you hold. You can be 100% shareholder and if there’s more than one shareholder they will need to be named on the application, provide details and a personal guarantee.

 

So an example of someone who uses their trading limited company to invest in property is for example a recruitment consultant living and working in the UAE sets up a private limited company in the UK. He uses the company to run his recruitment consultant. He also uses the company to invest in buy, sell and rent out buy to let property.

 

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Which option is best for a buy to let mortgage?

Mortgage Lenders prefer to lend to SPV’s which only own and rent property. Lenders see other activities as a potential risk or liability You can obtain BTL Mortgages in a Trading Company, but mortgage product options are limited.

 

From a lender’s perspective applications from SPVs are quicker and more straightforward to underwrite than applications from trading limited companies as trading companies tend to require a greater level of understanding by the individual underwriter. As the process of underwriting is easier when it comes to an SPV there are more mortgage options available for SPV’s.

 

It is this wider range of products and subsequent better offers that makes investing in buy to let property through an SPV rather than a trading limited company much more attractive.

 

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What is a Limited Company Buy-to-Let mortgage?

When buying a property to rent out in a limited company, you will need a Limited Company buy-to-let mortgage. A minority of Mortgage Lenders offer Limited Company buy to let mortgages and these mortgage products may differ from standard buy-to-let mortgages.

 

The company must have a current bank account for the mortgage direct debit. It is also essential to register the correct business activity known as Standard industry Classifications or SIC Codes.

 

Most lenders require the company to be defined using the following Standard industry Classifications (SICs}:

68100: Buying and selling own real estate

68209: Other letting and operating of owned or leased real estate

68320: Management of real estate on a fee or contract basis

 

For more information or to speak with a mortgage expert contact Liquid Expat Mortgages today.

 

So a new SPV Company with no assets or income can be set up within 24 hours and is an excellent vehicle for your mortgage. You can also lend money to the company for the deposit from your personal assets.

 

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Is a personal guarantee required?

When buying property in an SPV or trading Limited Company the directors and shareholders are often required to sign personal guarantees.

 

In essence this is no different to taking out a standard mortgage as in effect you are personally guaranteeing any mortgage should you miss payments, get into financial problems or if the asset depreciates considerably.

 

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Will I pay Stamp Duty?

No – typically on a remortgage there is no stamp duty to pay. It may be different if you are changing ownership, such as removing someone from ownership of a property or bringing in someone as a joint venture.

 

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Are Buy-to-let Mortgages Regulated?

Liquid Expat Mortgages is regulated by The Financial Conduct Authority (FCA). Currently most types of buy-to-let mortgages are not regulated. Any Regulated Buy-to-Let mortgages tend to have stricter affordability rules and are similar to a residential mortgages in that respect.

 

There are exceptions known as “consumer buy-to-let” which are if you are to rent the property to a close family member such as a. spouse, civil partner, child and so on.

 

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Can I obtain an interest only buy to let mortgage?

Until recently the preferred option for buy-to-let mortgages tended to be for interest only mortgages. However it can be in your best interest to look at repayment or part-repayment buy to let mortgages as this will give you better returns on investment over the years and in effect a tenant will have paid for the mortgage leaving you with a more valuable asset.

 

Some landlords may prefer interest-only mortgages as they look to expand their portfolio. By having lower payments they are able to save for deposits for further properties giving higher returns. This is known as leveraging.

 

Talk to liquid Expat Mortgages as whatever your overall plan is our mortgage advisers can help you obtain understand the options available to you.

 

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Generally what rental income is needed?

New regulations limit borrowing based on the rent deemed achievable by the lender’s valuer. The minimum is assessed at a rate of 5.5% ensuring a 125% coverage.

 

As such for a £100,000 mortgage you would need at least £572 rent. Put simply you need £5.72 rent at a minimum for every £1,000 borrowing. That demonstrates the minimum – mortgage lender criteria may be tougher.

 

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What minimum deposit is needed?

Mortgages are available up to 85% Loan to Value (LTV) for Purchase or Remortgage (as of end of 2019). 85% LTV Buy to Let Mortgages are the highest LTV you can get as a property investor. That’s just a deposit of 15% of the property value. Landlords with larger deposits can enjoy rates up to 2% lower including lower fees, at 80% LTV compared to 85% LTV.

 

85% Buy to Let Mortgages in 2019 are popular in BTL Mortgage Comparison research allowing landlords use ‘leveraging’. The High LTV Buy to Let Mortgage used to purchase more properties compared to a few with a Lower LTV.

 

The monthly rental amount can limit the maximum loan achievable and therefore requiring higher deposits. Our mortgage advisors can help you release equity from other properties to raise a deposit.

 

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Apply Online

How do you set up an SPV?

You can get your accountant to do this for you or do it yourself. If you do it yourself, you can do it online very quickly on the Companies House website or by post using an IN01 form. More detailed information and the appropriate links can be found on the Government website, gov.uk.

 

Please note: most lenders will only accept SPVs with a maximum of four directors/shareholders.

 

Setting up a limited company is simple:

You can register your company with Companies House online or by post. Online registration takes just 15 minutes and costs £12. Here are the key things that you’ll need when registering your limited company.

 

COMPANY NAME AND ADDRESS

  • You’ll need to create a unique company name (you can check it against the current register online at https://beta.companieshouse.gov.uk/)
  • The address can be your residential address

 

ONCE YOUR COMPANY IS REGISTERED

  • You’ll need to register for Corporation Tax within three months
  • You’ll need to set up a business bank account

 

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

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