If you are looking to set up a limited company for Buy to Let mortgage purposes then you should find this mortgage article a useful read. I’m a professional Mortgage Broker and will tell the story from a mortgage perspective.
Why is the timing right
Well there’s never been a better time to set up a limited company for Buy to Let mortgage purposes. How so? Well from the 8th July 2020 the Chancellor of the Exchequer Mr Rishi Sunak has introduced a Stamp duty holiday with no first level tax to pay on properties up to £500,000 so you could save thousands. The 3% second level surcharge tax for Buy to Let properties still applies.
This has got new and existing landlords up and down the country scrambling set up a limited company for Buy to Let mortgage purposes. Previously the wide spread consensus was to only set up a limited company for new purchases but with Stamp duty at this new low level the incorporation of existing properties is now very attractive too.
Who can be part of the company?
There are considerations to made when you set up a limited company for Buy to Let mortgage purposes as there would be for any business. If are not going it alone you could buy with a spouse/ relative or someone completely unrelated. However, you need to choose your fellow Directors carefully as properties are non-liquid assets and can create arguments if one party wants to sell and the other doesn’t – there’s not really a compromise position!
The general mortgage profile is as follows:
- Minimum age 21 years (we have options at 18 years, no minimum age for shareholders)
- Maximum 2 Directors (we have options without a maximum level of Directors)
- UK Nationals (we have foreign national options)
- Existing mortgage holders (we have non home owner options)
Who should you choose to be a Director when you set up a limited company?
Although the limited company is the legal owner the Buy to Let mortgage lender will still underwrite the individual Directors and make seek personal guarantees. So the past and ongoing credit worthiness of your chosen partner is important as their standing might lead to you attracting a high rate or in the worst case scenario prevent you from remortgaging.
Ownership structure
When you when you set up a limited company the Buy to Let Mortgage Lenders are looking at two distinct roles Director and Shareholder in their adjudication. The Director(s) is the decision maker. The Shareholder(s) is a passive income earner. They can be the same person.
Directors are underwritten. Shareholders who do not have a controlling interest will generally not be scrutinised or required to be applicants. An example might be Father and Mother own 90% shares and are Directors. Son and Daughter own 5% of the shares each. When they set up a limited company their intention was for Father and Mother to run the business and simply Son and Daughter to receive their dividends at a lower tax rate. The Shares might also be classified as “A” and “B”. The Buy to Let Mortgage Lender would recognise this and base their decision on the Parents standing.
In more complex scenarios there could be equitable interest, trusts and offshore components in the chain but these are not covered here.
Where do you start when setting up a limited company?
The setting up of a limited company should be handled by a professional Tax Advisor or Accountant. They will be familiar with the process which will involve an application to Companies House and a Company Bank Account being set up. In most cases it should only take a few days.
And, importantly every Director should take independent legal advice.
What permissions need to be granted when setting up a limited company?
Buy to Let Mortgage Companies will ensure you have on your incorporation includes a Standard Industrial Classification (SIC) code lodged on your Companies House record.
Common SIC code for property include:
• 68100 Buying and selling of own real estate
• 68209 Other letting and operating of own or leased real estate
• 68320 Management of real estate on a fee or contract basis
• 68201 Renting and operating of Housing Association real estate
Depending on the Buy to Let Lender they may want you to hold one or more of these.
Setting up a limited company to do more than hold property
Most Buy to Let Mortgage Lenders want the purpose of the business confined to holding property. The phrase that is used is to describe this confinement is a ‘Special Purpose Vehicle (SPV)’ limited company.
If the business is already operational and conducts other unrelated business activities then the Buy to Let lender will almost certainly want two years’ worth of Accounts to ascertain its profitability and may take a floating charge over some or all of the assets.
Is a Deposit needed when switching property into a limited company?
If you own a property already in your personal name most Buy to Let Mortgage Lenders will allow you to sell it to your SPV limited company using the equity as the deposit.
Setting up a limited company for Taxation Benefits
Taxation Benefits are the main reason for setting up a limited company. You will need to talk these through with a professional Tax Adviser as there are considerable tax differences which will impact your decision, these include:
- Mortgage interest tax relief
- Dividends allowance
- Retained income in a business
- Directors loans
- Capital gains tax allowance
- Latitude of offsetting of professional costs such as accountancy and legal fees
Mortgage product choice when setting up a limited company
Many of the high-street lenders do not offer mortgages to Limited Companies, and often if they do, the product range is much smaller, rates and fees are higher.
Succession planning considerations when setting up a limited company
One the benefits of setting up a limited company is succession planning. Shareholdings can be re-distributed or new issues created. Dialogue should take place with Buy to Let Lender in major changes. As a guide if the re-configuration means a shareholder is pushed over 20% to 24% stake then they may see this as a material change and apply “Director” underwriting.
The natural course for succession planning is of course Parents to Child with the desire to keep the property portfolio in the family.
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