Recent tax changes have made owning property through a company more cost-effective than buying it privately. These are the key steps you need to follow…
Purchasing buy-to-let property through a business has arguably never been as financially beneficial as it is today. Many landlords, investors and developers are setting up businesses to acquire and own buy-to-let homes, partly in response to ongoing changes in taxation. Next April, a four-year period of tapering tax relief will conclude with mortgage interest tax relief being restricted to the basic rate of income tax. Some landlords will see their tax liabilities doubling as a result of the UK Government’s crackdown on the wider buy-to-let market.
Today, roughly a third of BTL mortgages can be used to acquire property through a limited company. From a lender’s perspective, a buy-to-let mortgage provided to a company presents comparable risks to one provided to a private landlord or investor. Indeed, these companies are referred to as ‘tax wrappers’; the people behind the company determine its success or failure, rather than the company itself.
However, the process of buying a buy-to-let property through a limited company is rather different to purchasing one as a private individual. In this article, we consider the key stages you should follow if you’re planning to acquire and own buy-to-let homes through a business.
1. Get your personal finances in shape.
Even though properties will be bought through a company, the type of business used to accomplish this is effectively a shell. It’s known as a special purpose vehicle, or SPV. This distinguishes it from a normal trading company, which might have overheads, staff and/or multiple income streams. Mortgage companies find SPVs easier to assess, as they only exist for the purpose of buying and owning properties. This increases the likelihood of a successful mortgage offer being extended.
2. Source a deposit.
Again, this tends to originate with director/s rather than the SPV itself. However, deposits for buy-to-let properties bought through a limited company tend to be relatively high. A few lenders will provide a loan-to-value (LTV) of 85 per cent or higher, though most require at least a 20 per cent deposit. As with personal applications, the best deals are reserved for applicants retaining a considerably higher equity stake in the property.
This is one area where business BTL purchases compare unfavourably to those made in your own name. Another is the interest rate typically offered – often around one per cent higher to SPV applicants than to private individuals.
3. Register the business.
An SPV may be a trust or partnership, though for mortgage purposes, a limited company is usually the optimal choice. An SPV must have a maximum of two directors, who between them hold 100 per cent of the company’s shares. It may be possible to establish the company within one working day, registering it with Companies House using four Standard Industrial Classification (SIC) codes relating to property rental. As a limited company, an SPV must submit an annual statement, produce a set of accounts and complete a corporation tax return every year.
The fact a new SPV won’t have any income, and won’t be able to present two years of strong accounts (which established companies are expected to do) is taken into consideration by lenders. This is why the financial competence of the directors underpins the SPV’s ability to borrow money. They are likely to need to provide a personal guarantee. This acknowledges that if the lender is still owed money after repossessing the property, the director/s will be liable. Once the business is trading, its bank account can be bolstered with any deposit funds, which should originate in the UK and be attributable to one or both of the directors.
4. Decide whether to transfer existing properties in.
If you’re setting up an SPV specifically to handle buy-to-let property purchases and ownership, it might seem logical to transfer privately-owned properties into this tax wrapper. That way, they’ll attract the same benefits. However, transferring properties into an SPV from private ownership may result in three financial penalties – Stamp Duty Land Tax, Capital Gains Tax, and any early redemption charges on existing mortgages.
Transfers are deemed to take place at the property’s open market value, so undervaluing it before ‘selling’ it to the business won’t reduce your tax liability. However, if ownership of the properties can legitimately be described as a business rather than an investment, it may be possible to claim incorporation relief. This defers CGT until the property is sold by the SPV. Speak to a tax adviser, to establish whether your circumstances might qualify for incorporation relief.
5. Identify an appropriate property.
The same rules apply here as with a private purchase, though the financial arguments for or against a particular dwelling may be different. Since mortgage deposits and interest rates will be higher when buying through a company, factor this into your finances to ensure your final offer is viable. Mortgage lenders generally look for at least 125 per cent of monthly mortgage costs to be covered by achievable rental, so research the rental market in the property’s postcode and speak to local letting agents for advice. It’s usually possible to find mortgage lenders who will cater for any residential property type, including ex-local authority homes, new-build properties and HMOs.
6. Choose your mortgage.
With around a third of BTL mortgages now available to limited companies, this sector of the market is in rude health. Nonetheless, many mortgage vehicles come with caveats and restrictions that could make them ineligible for your specific requirements. For instance, we stated above lenders generally want 125 per cent of mortgage costs to be covered by rental income, yet some lenders increase this to 145 per cent. Up-front fees may reach 2.5 per cent of the sum being borrowed. And lenders occasionally restrict either the number of mortgaged BTL properties an SPV can acquire, or the total amount being borrowed – though any monetary ceiling is generally in the region of several million pounds.