Until 2015, there were fewer advantages to owning a property in a company as opposed to owning it in your own name. However, changes to the treatment of mortgage interest introduced after the 2015 budget made the Limited Company route far more appealing for any UK Expat or Foreign National looking to invest in Buy to Let property.
A brief guide to the most common questions for UK Expat and Foreign National Limited Company Buy To Let Mortgages.
Contents
Jump to a specific answer by clicking on a question below.
Liquid Expat Mortgages have worked with thousands of clients living and working around the world, many of whom bring complex challenges.
Take a look and see a number of case studies where we have helped clients with Company Buy To Let Mortgages.
1) SPV Ltd Co Refinances London Rental Flat
Liquid Expat Mortgages were contacted by a UK Expat living and working in Australia who wanted to expand his Buy to Let portfolio by refinancing a property to raise capital for a deposit.
The property was a 2-bed flat in a small block in North London which was owned in an SPV limited company.
2) 62 year old landlord expands portfolio through SPV Ltd Co
An experienced landlord who took out his first mortgage with Stuart Marshall at Liquid Expat Mortgages over 12 years ago wanted to expand his portfolio as he was still working as an Oil Engineer in Saudi and still earning a high salary which was tax-exempt
The customer had identified the property which was a 3 bed detached cottage in leafy Cheshire and which he intended to rent out as the area had a very strong rental demand for families looking for excellent schools and good commuter links to Manchester.
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.
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.
Advantages Of Buy to Let Mortgages For Limited Companies
In the last 7 years over 30,000 Limited Companies have been established exclusively for Buy to Let purposes,
mainly driven by legislation reducing mortgage interest relief for landlords holding property in a personal name.
1) Higher Tax Relief
The amount of Buy to Let Tax relief individual landlords can claim back has progressively diminished from a maximum of 45% to 20% for high rate taxpayers. However, this change does not affect Limited Companies. As a top-rate taxpayer, the tax payable via a Limited Company will be lower than the tax on individual income.
2) No tax on dividends £5,000 for individuals
From April 2016, the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance of £5,000. This means you can potentially receive tax-free dividend income from your investment properties in a Limited Company.
3) No income tax when reinvesting profits to secure further properties
Grow your BTL portfolio within a Limited Company as there will be no income tax on the retained profit, allowing more cash to be re-invested in other properties. Although corporation tax is payable on trading profits (20%; 2015/16 reducing to 18% by 2020), this is lower than the higher income tax rate (40% for £31,786 to £150,000; 2015/16).
4) Personal funds can be drawn back out of the company
Any investment you make into the Limited Company (e.g. the mortgage deposit), can be taken back out of the company as it can be classed as a Directors Loan- although check with your broker to ensure the lender accepts this.
5) Potential Personal Tax Savings
The rate of Corporation Tax is currently 19% which means a reduced tax liability compared to paying income tax as a higher rate taxpayer at 40%. Funds retained in the limited company means you have control on how much income is taken personally, therefore, reducing your potential income tax liability.
6) Easier Change of Ownership
The company will own the property. As such directors or shareholders can legally be changed to suit your circumstances such as adding a new partner to receive investment funds or buying out old partners. Changing ownership at Companies House is quicker and simpler than an individual selling a property.
7) Personal Expenditure
Mortgages are held in a Limited Company are sometimes not regarded as “commitments” by some lenders and therefore allows you increased private borrowing.
8) Not In Your Name
As the Limited Company owns the property you are not liable for tenant debts such as Council Tax, Utility bills etc. Normally these companies would write to the individual owner to attempt to retrieve payment and this has caused problems for individuals on their credit files. However, a Limited Company has greater privacy, security and less liability when it comes to tenants’ debts.
Disadvantages of Purchasing a Buy to Let through a Limited Company
In the last 7 years over 30,000 Limited Companies have been established exclusively for Buy to Let purposes,
mainly driven by legislation reducing mortgage interest relief for landlords holding property in a personal name.
1) Administrative Tasks
Dealing with HMRC, Completing Annual Returns and Company Accounts which can be carried out by an accountant to help you meet company requirements.
2) No Capital Gains Tax (CGT) allowance when the company sells a property
When a company sells a property, there is no personal Capital Gains Tax, Whereas individuals selling property would have £11,100 CGT allowance (2015/16)
3) Property Transfer Costs
If you want to transfer existing properties into the company, you will incur Stamp Duty Land Tax, Legal Costs, Higher Rates and potentially Capital Gains Tax. It is currently not advised to transfer properties you already own into a Limited Company as it is currently cost prohibitive.
4) Higher Mortgage Rates
Most mortgage lenders with a few exceptions charge higher interest rates and fees for Limited Companies than they do in personal names due to extra work involved. Our brokers will help you understand what works best for you.
5) Reduced Lender Choice
There are fewer lenders offering Limited Company Buy to Let Mortgages but that number is steadily increasing and with it comes a wider choice of products and better lending criteria.
6) Higher Legal Costs
Conveyancers often charge an extra fee for Limited Companies due to the extra workload involved such as registering mortgages at Companies House and ensuring Money Laundering Regulations are met.
However these should be considered against the backdrop of potential savings in either taxation or capital gains liabilities as a Limited Company versus Individual.
7) Personal Guarantees
Company Buy to Let will require a “Personal Guarantee” which is you agreeing to be liable for the mortgage debt of the company.
8) Privacy
Your tax documents are between you, your accountant and HMRC. A limited company has to publish its accounts, available online at Companies House showing your property portfolio company financial status to the public although accounts needn’t be full disclosure accounts and can be what are known as abbreviated accounts.
9) Releasing Equity
Private Landlords have enjoyed releasing equity from a property – especially in areas of good capital appreciation and are able to spend the money released on whatever they wish. With limited company property, you can still release equity, but funds belong to the company usually for re-investment. If you use those funds personally it will be classed as income and taxed appropriately.
How It Works
Individual
Basic before and after example for a higher tax rate (40%) taxpaying landlord who personally owns a property valued at £300,000 with a Buy to Let mortgage of £225,000 (75% LTV), receiving rent of £1,250 pcm.
BEFORE (up to tax year 2016/17):
Rental income:
£15,000 pa
Assuming average mortgage interest rate 3.49%: £7,852.50 pa
Tax due (landlord as higher rate taxpayer):
£7,147.50 x 40% = £2,859
Net profit calculation: £7,147.50 – £2,859 = £4,288.50
AFTER (from tax year 2020/21):
Rental income now the taxable profit: £15,000 pa
Assuming average mortgage interest rate 3.49%: £7,852.50 pa
Taxable profit calculation: £15,000 x 40% = £6,000
Mortgage interest relief at basic tax rate: 20% x £7,852.50 = £1,570.50
Tax due: £6,000 – £1,570.50 = £4,429.50
Net profit calculation:
£15,000 – £7852.50 – £4,429.50 = £2,718.00
Inflation aside, this represents a 37% reduction in after tax profit from 2020 onward.
Please note: this only takes into account the mortgage interest. It doesn’t include any other earned income or any other account related cost.
LIMITED COMPANY
Basic before and after example for a higher tax rate paying landlord who owns a property in a Limited Company valued at £300,000 with a Buy to Let mortgage of £225,000 (75% LTV), receiving rent of £1,250 pcm.
BEFORE (up to tax year 2016/17):
Rental income:
£15,000 pa
Assuming average mortgage interest rate 3.49%: £7,852.50 pa
Talk to our mortgage experts today and we can help you with any questions you may have about Company Buy to Let Mortgages. Our experienced team of Mortgage Consultants are qualified and friendly and will take care of all the hard work and support you throughout the whole process.
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