Why set up as a Trading Limited Company or an SPV?
As of 6 April 2020 landlords can no longer deduct mortgage interest and other allowable costs from their rental income before calculating their tax liability. It will be restricted to the basic rate of income tax which is currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income.
This means that your taxable income will rise, especially if you’re a higher or additional rate tax payer.
What is an SPV?
A Special Purpose Vehicle (SPV) is a non-trading Limited Company incorporated at Companies House and is simply a company that has a “Special Purpose” of solely owning and renting out property. Like any other limited company, you can draw income and dividends from the company, while profits retained within the company could, for example, ultimately be reinvested into expanding your property portfolio.
For example, a UK Expat or Foreign National in the UAE who already has a UK Limited company for their main day to day business can set up a separate SPV Limited company in which to exclusively buy, sell and rent out Buy to Let property.
What is a Trading Limited Company?
A trading limited company is a legal structure set up to run a business. If the company receives income from any business or assets other than your Buy to Let property, then it would be considered a trading company.
For example, a UK Expat or Foreign National in the UAE with a UK limited company for its principal business but also invests in buying, selling and renting out of Buy to Let property then, in this case, it would be considered a trading company.
Which Option is Best for a Buy to Let Mortgage?
Mortgage Lenders prefer to lend to SPV’s which only own and rent out a property. Whilst you can obtain BTL Mortgages in a Trading Company, the product options are limited as lenders see other activities as a potential liability.
Applications from SPVs tend to be quicker and more straightforward as underwriters find it easier to understand an SPV which has one sole business income stream. Trading companies can be complex because of the various income streams and as such there are more mortgage options available for SPV’s than for trading companies.
It is this wider range of products and subsequent better offers that makes investing in Buy to Let property through an SPV rather than a trading limited company much more attractive.
What is a Limited Company Buy to Let Mortgage?
Buying a property to rent out in a limited company requires a Limited Company Buy to Let mortgage for which the company registers the correct business activity known as Standard industry Classifications or SIC Codes.
Most lenders require the company to be defined using the following Standard industry Classifications (SICs}:
68100: Buying and selling own real estate
68209: Other letting and operating of owned or leased real estate
68320: Management of real estate on a fee or contract basis
The company also requires a current bank account for the mortgage direct debit. A new SPV Company with no assets or income can be set up within 24 hours and is an ideal vehicle for your BTL mortgage. You can also lend money to the SPV for the deposit from your personal assets.
Is a Personal Guarantee Required?
Directors and shareholders are often required to sign personal guarantees. In essence, this is no different from taking out a standard mortgage as in effect you are personally guaranteeing any mortgage should you miss payments, get into financial problems, or if the asset depreciates considerably.
Will I Pay Stamp Duty?
You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price in England and Northern Ireland although rates vary depending on whether you’re a first-time buyer and the value of the property. The tax is different if the property is in Scotland or Wales.
On a remortgage, there is no stamp duty to pay. However, it may be different if you are changing ownership, such as removing someone from ownership of a property or bringing in someone as a joint venture.
One of our advisers can guide you through this sometimes confusing area of property purchase.
Are Buy to Let Mortgages Regulated?
Liquid Expat Mortgages is regulated by The Financial Conduct Authority (FCA). Currently, most Buy to Let mortgages are not regulated. Any Regulated Buy to Let mortgages have stricter affordability rules and resemble residential mortgages in that respect. There are exceptions known as “consumer Buy to Let” for property rental to close family members – spouse, civil partner, child etc.
Can I Obtain an Interest Only Buy to Let Mortgage?
The simple answer is YES. in most instances this can be up to 80% Loan to Value.
However, it‘s worthwhile looking at repayment or part-repayment Buy to Let mortgages as over time this will give you better returns on investment.
If the property is tenanted, the mortgage will be repaid via rental income, hopefully leaving the Buy to Let Landlord with a valuable paid-up asset at the end of the mortgage term. Some landlords may prefer interest-only mortgages to help expand their portfolio as having lower payments they can save for deposits giving higher returns. This is known as leveraging.
Whatever your overall plan is, our mortgage advisers can help you understand the options available to you.
What are the Rental Income Requirements?
New regulations limit borrowing based on the rent deemed achievable by the lender’s valuer. Typically, a lender will stress test the borrowing at 5.5% with a coverage amount of 125%.
Borrowing £100,000 would need a rent Per calendar month of £572.92 (£100,000 * 5.5% / 12 = £458.33 * 1.25 = £572.92).
In order to maximise your borrowing facility or achieve lending on lower-yielding properties, lenders can stress test the borrowing at the rate you achieve, if you take a 5 year fixed rate. For Expats, these rates typically start at 3.99%, with a coverage amount of 125%. Therefore, to borrow the same £100,000, you would need a rental income of £415.63 per month, based on these figures.
Is there a Minimum Deposit Requirement?
Mortgages currently available are up to 80% Loan to Value (LTV) for a Purchase or a Remortgage. Landlords with larger deposits tend to benefit from lower rates and lower fees. The monthly rental amount can limit the maximum loan achievable and therefore requiring higher deposits. Our mortgage advisors can help you with all questions in relation to Loan to Values and current available rates.
How do you set up an SPV?
This is straightforward. An accountant to do this for you or you can do it yourself online at Companies House or by post using an IN01 form.
The key things that you’ll need when registering your limited company.
- You’ll need to create a unique company name which can be checked against the current register online at https://beta.companieshouse.gov.uk/
- You ‘ll need a registered address which can be your residential address
- Once your company is registered you’ll need to register for Corporation Tax within three months
- You’ll need to set up a business bank account