How to Set Up a Limited Company for Buy to Let

How to Set Up a Limited Company for Buy to Let

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Here at Think Plutus, we routinely receive questions from landlords either unsure how to set up a limited company for a buy-to-let mortgage or whether doing so would benefit them.

There are several advantages to purchasing a rental property through a limited company, primarily related to changes to tax relief.

Still, you do not necessarily need to incorporate a new business to manage your portfolio.

Most landlords opt for a Special Purpose Vehicle (a category of limited company) – we will explain why, how that affects your mortgage application and the pros and cons to consider.

SPV Limited Companies and Buy-to-Let Trading Structures Explained

A Special Purpose Vehicle (SPV) is a limited company set up through Companies House in the usual way.

The difference from another limited business is that an SPV is specifically designed for owning and letting out properties, whether one residence or a large portfolio.

Lenders offering commercial buy-to-let mortgages may only lend to SPVs.

A rental property mortgage for an existing trading company is rather more complex and less appealing to the lender.

However, that does not mean that you cannot own and rent out a property through a current limited business, just that your mortgage terms may not be as favourable or that your choice of lenders might be smaller.

How to Set Up an SPV Buy-to-Let Property Company

Establishing an SPV is relatively straightforward, and if you register the business yourself with Companies House, you will need to pay a small fee, from £12.

The process involves:

  • Choosing a trading name (that is not already in use).
  • Selecting your registered address – normally a place of business, office, accountant or your home address.
  • Providing the names of the company directors and shareholders – that may be just one individual, and you can simultaneously be a shareholder and a director.

Once you have entered those details, you must select the appropriate business category, called a SIC code. Buy-to-let SPVs will be one of the following:

  • 68100 – a company involved in buying or selling properties.
  • 68209 – a business that lets or operates leased properties.
  • 68320 – the management of property.
  • 68201 – property renting or running housing association properties.

There are a few other factors, such as adopting a Memorandum of Association and Articles of Association, although you can choose to use the default documents if you wish.

From there, you will need to create a business bank account and register the company with HMRC for Corporation Tax (we will explain the tax implications shortly!).

Tax Benefits of Owning a Buy-to-Let Property Through an SPV

Landlords who buy rental properties as individuals need to submit self-assessment tax returns each year, declaring their income and expenses and paying the associated Income Tax.

Many landlords have decided to incorporate an SPV because the effective tax rate you pay as a limited company usually works out lower (and sometimes significantly lower) than as an individual buy-to-let property owner.

In summary, if you own a buy-to-let as a sole trader, you will pay:

  • 0% Income Tax on the first £12,570 of income due to the Personal Allowance.
  • 20% Income Tax from £12,571 to £50,270.
  • 40% Income Tax from £50,271 to £150,000.
  • 45% Income Tax on anything above £150,000.

While you can deduct certain expenses from your buy-to-let income, the changes in tax relief mean that individual landlords cannot claim all of their mortgage interest as a tax-deductible expense.

Instead, you can claim a 20% tax credit – but you only get 20% of the cost of your mortgage back.

Incorporated companies have different rules and can deduct 100% of the mortgage interest paid from their revenue before arriving at a taxable profit figure.

They also pay a standard 19% Corporation Tax rate.

As a business owner, you can claim greater tax deductions and pay a lower overall tax rate – although you will still need to pay either Dividend Tax or Income Tax on profits you pay yourself from the business.

The Pros and Cons of Incorporating a Buy-to-Let Property Limited Company

Setting up a limited company SPV can be more complex and time-consuming than investing in a buy-to-let as an individual landlord, and there are several pros and cons to consider.

Benefits of Owning Rental Property as an SPV

  • Lower Corporation Tax rates and higher deductible mortgage interest expenses.
  • Reduced personal liability, as an SPV is a separate legal entity from you as an individual.
  • The option to pay yourself through a salary and dividends, reducing your Income Tax or Dividend Tax costs further.
  • Higher credibility and easier access to competitive buy-to-let commercial mortgage rates.
  • Transferring a rental asset from one company to another avoids exposure to Capital Gains, Inheritance Tax and Stamp Duty.

Pitfalls of Managing a Buy-to-Let Through a Limited Company

  • Owning a limited company carries fiduciary duties and mandatory requirements such as submitting annual accounts.
  • Buy-to-let mortgages for limited companies are less common than sole trader mortgages, although the tax reliefs are higher.
  • Transferring a property from private ownership to a limited company can be complex and may incur tax liabilities since the transaction must be recorded as an official sale.
  • Most SPV owners need to hire an accountant to manage their accounts submissions, although this is not always necessary.

Choosing Whether to Set Up a Limited Company to Purchase a Buy-to-Let Property

The right decision will depend on your circumstances, such as whether you already own a buy-to-let and wish to transfer it to an SPV or are considering an investment and want to set up the optimal trading structure.

Running a limited company inevitably involves extra administration work, but this may be negligible if you are already a hands-on landlord.

Changes to the tax regime, where landlords can no longer claim 100% tax relief on mortgage interest, have certainly made an SPV attractive from a tax efficiency perspective.

Landlords who fall into a higher or additional rate tax bracket or who own several properties normally stand to benefit the most.

Either way, there are buy-to-let lenders who will consider offering a mortgage to an SPV, trading company or sole trader landlord, but picking wisely could make a sizable difference to your annual profits.

Frequently Asked Questions: Setting Up a Limited Company Buy-to-Let SPV

Below we will run through some frequently asked questions about SPV mortgages and trading as an incorporated company.

Is It Easier to Get a Buy-to-Let Mortgage as an SPV Limited Company?

Buying a rental property as a limited business means that your mortgage prospects change since this is considered a commercial mortgage.

Most high street banks only offer buy-to-let mortgages to individuals, so you will require a specialist buy-to-let mortgage provider – who may offer more competitive rates in any case.

Purchasing a buy-to-let as an SPV is though increasingly popular, so there are an increasing number of lenders that prefer SPV applicants.

Think Plutus can assist with whole-of-market mortgage lender access and advise which providers are most suited to your application.

Can I Transfer a Buy-to-Let Portfolio to a Limited Company?

If you decide to transfer ownership from yourself to your SPV, you will need to pay Stamp Duty and possibly Capital Gains Tax because the transfer constitutes a sale – you cannot simply give the buy-to-let property to the business.

However, it may provide long-term tax benefits that outweigh the initial cost.

Mortgage lenders will treat the transfer as a purchase, but you can use the equity within the buy-to-let as your deposit.

It is not possible to port a buy-to-let mortgage from a sole trader product to a limited company mortgage, so you will require a new mortgage lender and to repay the original debt.

Do I Need to Give a Personal Guarantee to Get an SPV Buy-to-Let Mortgage?

Most buy-to-let lenders will ask any limited company to provide a personal guarantee, usually from all directors.

Personal guarantees assure the lender that you will repay the mortgage. They should be approached with caution, as there is a risk that you could be exposed to repossession if the company falls behind with the repayments.

Limited company buy-to-let structures are optimal for tax efficiency, but a commercial lender will still consider your finances and credit record before making an offer.

If you have an alternative security source, you may be able to use this as collateral in place of a personal guarantee.

Can I Get a Buy-to-Let Mortgage as a Newly Incorporated Limited Company?

Yes – a mortgage lender normally finds it easier to lend to an SPV since the limited company is designed specifically for buying and managing rental properties.

You can create a new SPV for each rental property and have varying directors on each board if you wish to keep the businesses separate.

However, the lender underwrites the commercial loan against the director or primary shareholder rather than the company itself.

You may need to provide a guarantee, particularly if the company is newly incorporated and has no trading history.

How Much Can I Borrow Through a Buy-to-Let Limited Company Mortgage?

While interest rates on private mortgages tend to be a little lower than on commercial mortgages, you will also usually be able to borrow much more as an SPV.

Mortgage lenders use a stress test to check whether you would still pass the affordability assessment at a higher interest rate. Still, the requirements are less stringent since a limited company is taxed differently.

As a rough guide, you can look at the projected annual rent and divide this by 125%, plus a 5.5% stress test value, to get an indication as to what you might be able to borrow.

Please get in touch if you would like a more accurate calculation since you may be able to borrow a higher value depending on the property and circumstances.

Do I Need to Set Up a New Bank Account to Manage a Buy-to-Let Property as a Limited Company?

Yes, you will require a business bank account since a mortgage lender will need the commercial mortgage repayments to come from an account held in the company name.

Is There a Limit on the Number of Directors or Shareholders I Can Have in an SPV Buy-to-Let Limited Company?

Technically, no, but most mortgage lenders will have a maximum of four people per application, so we usually advise having no more than four directors.

Any shareholder that owns 25% or more of the company will need to be named on the mortgage application.

Can I Purchase a Buy-to-Let Property Through an SPV as an Expat?

Mortgage providers will usually be comfortable lending to an ex-pat. They will not normally have any issue if you have incorporated an SPV and are buying a property in the UK.

What Type of Buy-to-Let Property Can I Mortgage as an SPV?

Some commercial mortgage lenders will have limitations on lending against non-standard properties, but there is nearly always a suitable provider.

SPV mortgages are available against commercial and semi-commercial properties, HMOs, student lets, individual flats and houses, and freehold rental residences.

Expert Assistance With SPV Buy-to-Let Mortgages

If you would like more information about purchasing a rental property as an SPV limited company or wish to explore the buy-to-let mortgage options, please get in touch with Think Plutus at your convenience.

As a private, independent mortgage broker, we offer specialist mortgage advice, always tailored to your circumstances, requirements and borrowing needs.

Speak to a mortgage adviser today

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