With so many changes over recent years to the buy to let market the most sensible investment approach is to use a limited company. Many landlords have indicated that they want to move to a limited company structure to invest in rental properties in the near future. If this is of interest to you then you will find this guide helpful.
Why you should use a Limited Company for Buy to Let Investment?
You can create a Special Purpose Vehicle (SPV) through a limited company which you only use for property investment. This is a clean solution favoured by the majority of lenders. There are a few advantages to using a limited company and SPV and some disadvantages too.
- Lower rate of tax on rental income – if you are in the highest 40% tax bracket compared to 20% corporation tax
- You can treat mortgage interest as an expense to offset corporation tax
- You can use an SPV to broker JV deals cleanly
- Most mortgage lenders will work with clean limited companies set up as SPV’s
- Profits are taxed and so are dividends and any director drawings
- The process for arranging mortgages is longer
- Mortgages tend to be more expensive
Getting a Mortgage with your Limited Company
While you could approach mortgage lenders directly we recommend that you use the services of a competent mortgage broker. They will have experience of finding the best mortgage offers for limited companies.
Using an SPV for buy to let investment is a relatively new way of working so the process is still fairly slow with 6 to 8 weeks being the average time at present. This will be a problem if you are under time pressure to make a purchase such as at an auction for example.
The other thing that you need to be aware of is that mortgages tend to be more expensive for limited companies than they do for individuals. Also the norm is 75% loan to value. You can go for a higher loan to value but this will certainly incur additional costs.
Setting up your Limited Company for Buy to Let Investing
Our advice is to set up your limited company SPV as this will be a lot more attractive to mortgage lenders. A lender will expect an SPV to be a relatively new entity and have a specific Standard Industrial Classification of Economic Activities (SIC) codes either:
- 68100 buying and selling of own real estate
- 68209 other letting and operating of own or leased real estate
Mortgage lenders will undertake background checks on the applicants and the directors (if different). Lenders are looking at a potential landlord’s ability to overcome challenges such as planned renovations, voids and other buy to let risks.
You do not want your limited company to have traded before in another industry. This will complicate matters when it comes to borrowing money so we recommend that you create a brand new company for buy to let investment only.
Lender Security Requirements
Different lenders will insist on different security arrangements to lend money to an SPV. Here are the most likely scenarios:
Personal Guarantees – the lender may require the directors to provide personal guarantees that they will cover any outstanding expenses after selling the property if there is a default on a loan.
Debenture – this will impose floating or fixed charges if there is a loan default or the company becomes insolvent.
Deed of Priority – this is an agreement about who will be first in the queue if there are more than one lender involved with an SPV.