{"id":5025833,"date":"2019-09-19T09:30:17","date_gmt":"2019-09-19T08:30:17","guid":{"rendered":"https:\/\/www.buyassociation.co.uk\/?p=5025833"},"modified":"2023-10-27T11:14:59","modified_gmt":"2023-10-27T10:14:59","slug":"a-guide-to-limited-company-buy-to-let-property-investment-for-2019-2020","status":"publish","type":"post","link":"https:\/\/www.buyassociationgroup.com\/en-gb\/2019\/09\/19\/a-guide-to-limited-company-buy-to-let-property-investment-for-2019-2020\/","title":{"rendered":"A guide to limited company buy-to-let property investment for 2019\/2020"},"content":{"rendered":"

The changes across the buy-to-let sector in recent years have created an environment where the most common-sense approach for those looking to build a sustainable portfolio is to use a limited company structure.<\/strong><\/h4>\n

Research from Precise Mortgages recently demonstrated that 55% of landlords intend to use limited companies to buy rental properties in the coming year \u2013 well over double the number of those looking to buy personally.<\/p>\n

This extended post delves into some of the key fundamentals of buying rental property in this way\u2026<\/p>\n

Why use a limited company (special purpose vehicle) for buy-to-let properties?<\/strong><\/h4>\n

To clarify, a special purpose vehicle (SPV) for buy-to-let<\/a> purposes is a limited company that is created to solely hold property and nothing else. As will be highlighted below, from a lending perspective, such vehicles are preferred as they are easier to underwrite relative to trading limited companies.<\/p>\n

Buying properties in this way is not without its downsides. As an owner of property within an SPV, you will incur corporation tax on profits in addition to income or dividend tax when you or any other directors withdraw funds (although there are some allowances).<\/p>\n

\"Limited

SPVs have extra administrative obligations \u2013 i.e. producing annual accounts in a fixed, statutory format of which abbreviated versions will also have to be filed at Companies House and be publicly viewable (bar specific circumstances). While lending in this space<\/a> is becoming increasingly competitive, limited company buy-to-let payrates tend to be higher also.<\/p>\n

However, there are several benefits worth taking note of\u2026<\/p>\n

When profits are compounded over an extended period within a corporate vehicle, larger amounts of capital can be deployed for future investments than would be the case if the funds were carried forward in one’s own name. Therefore, \u2018mini-portfolios\u2019 can be built where an investor can stop buying in one company (SPV) and buy in another. Each will pay down all its debts and\/or generate a cash positive surplus to reinvest in properties within new SPVs as the overall business grows and becomes more efficient.<\/p>\n

Family members can be more involved through becoming shareholders and directors, resulting in potential inheritance tax (IHT) and capital gains tax (CGT) benefits.<\/p>\n

As a company director, investors can also pay money into a personal pension. Here, the amount of profits that the company earns is reduced and therefore the amount of corporation tax owed also decreases. Money in Self-Invested Personal Pensions (SIPPs) can also invest in commercial properties.<\/p>\n

Buy-to-let SPV property purchasing using mortgage finance<\/h4>\n

Although there is nothing stopping you from approaching lenders directly, working with an experienced mortgage broker<\/a> is recommendable. A good intermediary will find the best products suited to your own financial circumstances and the property in question. Experienced brokers also have direct relationships with underwriters and, from time to time, exclusive access to favourable product options.<\/p>\n

As the corporate buy-to-let lending sector is relatively embryonic, new application processes are reportedly slow (up to 6-8 weeks at the time of writing) \u2013 which will be of little use when purchases are time-constrained (at auctions<\/a>, for example).<\/p>\n

In such situations, investors should position themselves to be able to transact quickly either through cash, some form of pre-existing and undrawn debt facility or \u2013 more commonly \u2013 reputable bridging finance.<\/strong><\/p>\n

Most investors would then eventually refinance (rather than tie-up funding that could be used for other purposes). Here, it should be observed that flash finance mechanisms can be costly, the 6-month rule will normally apply and lenders frown upon the \u2018rinse and repeat\u2019 and \u2018no money left in\u2019 models.<\/p>\n

At the time of writing, mortgages within limited companies tend to be more expensive with 75% loan to value requirements largely being the norm. Anything higher is likely to come with associated conditions and higher pay rates.<\/p>\n

As with personal buy-to-let mortgages, investors will also incur an arrangement fee (which are also slightly higher than personal buy-to-let mortgages at the time of writing) and be subject to early redemption charges (ERCs). The costs of the more advanced form underwriting, however, are not necessarily passed on to the borrower.<\/p>\n

To ensure there are no administrative hold ups, you should have your company formally established with a bank account. Buy-to-let SPV lenders are reportedly tightening on income assessments and will typically require at least 2-years\u2019 worth of SA302s from the HMRC, tax overviews, 3-months\u2019 worth of bank statements and, if you are employed, your latest P60 and three of the most recent payslips.<\/p>\n

Up-to-date information on your existing property holdings may also be requested including full address(es), value(s), outstanding mortgage(s), lender names, monthly payments and a rental income schedule.<\/p>\n

We also suggest having portfolio, cashflow forecast and income\/expenditure spreadsheets in addition to up-to-date tenancy agreements and a simple business plan which will outline your investment intentions<\/a> and other key figures.\u00a0 Note that some or all these details may require validation.<\/p><\/blockquote>\n

Prior to the lender undertaking any background checks, it is also advisable to verify both your personal (consumer) and business credit scores with a reference agency such as Experian. Any mortgage application will be classified as a \u2018hard search\u2019 and therefore leave a footprint on your credit file.<\/p>\n

Moving forward, the ever rising using of technology<\/a> within key financial processes is likely to mean that your creditworthiness as a buy-to-let mortgage borrower will be assessed on a more programmatic (as opposed to a \u2018trust\u2019) basis. Mortgage lenders are increasingly adopting more sophisticated methods of analysing open market value, rental premiums and other key figures.<\/p>\n

Structuring a limited company for buy-to-let purposes<\/strong><\/h4>\n

From the outset, to facilitate a smoother application process, the lender will want to know that the corporate structure is set up for the sole purpose of holding property. A Limited Company SPV therefore must have limited activities. The SPV will normally be created recently and registered under one of the following Standard Industrial Classification of Economic Activities (SIC) codes:<\/p>\n