Why buy Properties in a Limited Company name?
Buy to Let mortgage lenders – if the borrowing is in a limited company name – will invariably expect directors to give personal guarantees so the reason for borrowing in a limited company name is not to escape personal liability.
Buying properties in a limited company may be beneficial from a tax point of view although ibmco does not advise on tax and we strongly recommend to that you seek professional tax advice before making any property investment decisions.
Also, limited companies are not subject to the stricter affordability checks on personal Buy To Let borrowing which was introduced by the Prudential Regulation Authority on 1 January 2017. This means that a limited company may be able to borrow more against a property than a landlord borrowing personally.
Limited companies pay Corporation Tax, not Income Tax, and as such are not affected by the changes to tax relief on finance costs for personal BTL borrowers. However, the owners of the company will then need to extract the net income from the company – usually by way of salary or dividends – at which point income tax on the salary and/or dividends will become due. Everyone’s circumstances are different so please take professional tax advice.
Borrowing in a Limited Company name – the application process.
Generally speaking, when assessing a Buy to Let mortgage application, lenders will carry out background checks on the directors/shareholders just as they would on individuals applying in their own names. Therefore there is very little difference in the application process.
The depth of the underwriting may depend on the number of properties owned (lenders carry out more detailed underwriting on portfolio landlords) – but this is true of both individuals and companies. If an application is made in the name of a brand new company, clearly the company itself has no history to check, so the underwriting must be based on the shareholders/directors. (It is perfectly acceptable if buying a property for investment purposes to apply for a mortgage in the name of a brand new company).
Most Limited Company Buy to Let applications are in the name of SPV companies. SPV means Single Purpose Vehicle and means that the company is formed solely for the purpose of property investment. More about this below. However if you are borrowing in the name if a company which also trades in another way the application may be more complicated as the lender will need to examine the company’s trading history and financial strength as well as the proposed property transaction.
Advantages and Disadvantages of borrowing in a Limited Company name.
It may be possible to borrow more on a Buy to Let mortgage in a Limited Company name than in a personal name. This is because lenders take into account the borrower’s potential tax liability in their affordability calculations. They will expect the rent which a property generates to cover the interest cost by a certain margin and this margin will be higher for higher rate taxpayers. (Remember that gross rental income for individuals is now counted towards taxable income so many landlords will be in higher tax brackets). Application of this rental assessment may put an upper limit on the amount that can be borrowed. Limited companies are not subject to the same tax rules so are usually assessed on the least restrictive affordability calculation equivalent to a basic rate taxpayer.
On the other hand, not all Buy to Let lenders will lend to limited companies so the choice of lender narrows (although there is still a good range of lenders for limited companies). In effect the interest rate a limited company pays may be slightly higher than could be achieved in an individual name. But these days there are competitive terms available for companies.
Some limited company lenders have no restriction on the upper age of directors.
Setting up a Limited Company to invest in property
You can of course ask your accountant to set up a Limited Company for you, but the process is very simple and you can do it yourself at a cost of around £15. See https://www.gov.uk/limited-company-formation.
Once set up you will have some responsibilities such as filing accounts annually and an annual ‘Confirmation Statement’.
Part of the set-up process is choosing an SIC (Standard Industrial Classification) code for the company. A company can have several codes, but we’d suggest the correct ones to make sure your company is an SPV vehicle are :
68100 Buying and selling of own real estate and 68209 Other letting and operating of own or leased real estate
Apart from the incorporation of a company you can only change the SIC code when filing the annual Confirmation Statement but since you can choose to file the annual statement at any time this doesn’t cause much restriction. Therefore you can re-classify an existing company to make it into a SPV property investment company. An example would be where the owners of a trading company owning its own premises decide to retire or close down the trading business and in future simply rent out the company’s property.
Does it make sense to transfer properties in personal name into a Limited Company?
Legally, you can’t simply ‘transfer’ properties into a limited company, what you have to do is to sell the properties at market value to the company. This means (a) that you may create capital gains tax liabilities for yourself and (b) the purchase by the company will be subject to the current rates of stamp duty, including the additional rate for property not purchased for residential use.
Please consult your accountant or tax adviser.