How Just Mortgage Brokers Can Help You
When you set out to purchase a buy-to-let property, one of your first considerations will be whether to run your buy-to-let business on a personal basis or to operate as a limited company. The course you choose will have a number of implications – mainly with regard to tax liabilities, but it will also affect other factors such as what type of mortgage you can get.
Here we’ll look at some of the considerations in setting up a limited company, and the difference between a special purpose vehicle (SPV) and a trading limited company.
Advantages of limited company buy-to-let?
Our article on the benefits of limited company buy-to-let explains in more detail why this approach might be more advantageous for some buy-to-let landlords in the coming years. In summary, recently announced changes to tax rules mean that landlords will only be able to claim tax relief for mortgage interest at the basic rate (20%) even if they are a higher rate (40%) or additional rate (45%) taxpayer, which could have a profound effect on some landlords’ overall yields. However, at the same time as these changes to personal taxation, corporation tax rates are being reduced – from 20% to 19% in 2017, then to 17% in 2020. By running your buy-to-let business via a limited company structure, it may therefore be possible to minimise your tax liabilities.
There are other implications to consider – for example with regard to capital gains tax when a property is sold – so it’s important to speak to a chartered accountant or specialist tax adviser about your longer-term plans for your property portfolio before deciding to set up a limited company. Whether you opt to run your business on a personal or limited company basis, it’s advantageous to make your decision at the outset, as restructuring your business later on can attract additional costs in transferring the ownership of properties from personal to company ownership (or vice versa) in terms of both legal fees and tax liabilities.
SPV or a trading limited company?
In buy-to-let terms, special purpose vehicles (SPVs) are, as the name suggests, limited companies which exist only to hold the property and as a structure to channel the income and expenditure of your buy-to-let business. Like any other limited company, you can draw income and dividends from the company structure, while profits retained within the company could, for example, ultimately be reinvested into expanding your property portfolio.
If your limited company receives income from any business or assets other than your buy-to-let property, then it would be considered a trading company. It’s important to be aware that most buy-to-let lenders will only lend to SPV limited companies, as the inclusion of other business channels and income streams via the company structure arguably introduces an element of risk. There are, however, some more niche lenders who do offer buy-to-let mortgages to trading companies.
Any other considerations in setting up an SPV?
An SPV may be an already existing trading company which will now only be used for your buy-to-let business, or it can be a new company with no prior record of trading; some lenders prefer the latter as it eliminates any potential risks (however unlikely) associated with the company’s prior trading activity.
Assessment criteria for limited company buy-to-let mortgages can vary from lender to lender; the personal financial history of the company director(s) will often be taken into account, and lenders usually require the director(s) to personally guarantee the debt.
Setting up an SPV – or buying an existing limited company to use as an SPV going forward – is surprisingly straightforward and inexpensive. In most cases you can incorporate a limited company online; it currently costs only £12 and registration with Companies House usually takes 24 hours to complete. Alternatively, your accountant can arrange to register the company on your behalf.
Your company will also need an SIC (“standard industrial classification of economic activities”) code, which specifies what type of business the company conducts. Most lenders will require your SPV to have the correct type of SIC registered, specifically relating to property letting – Companies House lists these under section L (“Real estate activities”).