When do you need a commercial mortgage?
Commercial mortgages generally take over from business loans. Business loans up to £25,000 are unsecured but for larger amounts lenders require security to reduce their risk and as a consequence this falls into a different lending category where a commercial mortgage is required.
Why use a broker?
It makes sense to use a specialist commercial broker who has the contacts and market knowledge to source you the best deal available for your circumstances.
The broker will present your case to the lender, you must be present the whole facts both positive and negative and be co-operative with your broker.
Do not use more than one broker as your application may then be presented to a lender via several different sources and will make the lender think there is something either wrong with the deal and you may well end up with no loan offer.
By using an FCA registered broker you are ensuring that you will be working with a bone fide person/company and that they meet the FCA standards and provide a professional, high quality service.
Limited Company Buy to Let
There are a number of ways to invest in buy to let. Limited company structures are favoured by investors who seek to use the generally lower rate of corporation tax. Owning BTL property via a Ltd Co results in different financial outcomes to owning buy to let as an individual.
Be sure to seek appropriate professional advice before proceeding.
Using a limited company or SPV for buy to let is an attractive option for property investors wanting to maximise the available mortgage interest relief for buy to let properties.
Corporation tax, not income tax – it makes a difference
Due to the recent government tax relief changes on buy to let, landlords are now considering purchasing property as a limited company, as they are not subject to the same tax relief changes, it makes them a potentially cost effective method of maintaining and expanding your portfolio profitability.
As well as this, there is no income tax to pay when you reinvest profits to buy further properties, meaning you could grow your portfolio much quicker.
Corporation tax is payable on your profits, which is currently 20%. (This will be cut to 17% by the year 2020.)
Special Purpose Vehicle (SPV) mortgages
If you buy to let through a limited company, the company is commonly set up and known as a special purpose vehicle (SPV) that exists only for the purchase of property and related business, such as management and disposal.
The majority of lenders will require your limited company to be an SPV, however we do work with some lenders who will accept applications from currently trading companies.
We share more information on setting up an SPV in the article “Pros and cons of buy to let through a limited company”
Pros and cons of limited company buy to let
You will become a company director
As the borrower, you will need to be a director of the company and may also need to be a majority shareholder with at least 80% of the company shares registered in your name.
An overview of using a limited company for buy to let investing
Purchasing buy to let property through a limited company begins with setting up and registering a company. Often, but not always, the company will be a special purpose vehicle (SPV).
An SPV is distinct from a trading limited company in that it carries out a single niche activity. In the case of a property business, that activity will be buying, holding and selling buy to let real estate.
A limited company must have at least one director and one shareholder, which can be the same person.
The company is a separate legal entity to the individual who set it up. The company will be listed at the Land Registry as the legal owner of the property, and will appear on rental contracts as the landlord.
Otherwise, landlords can use their limited company to manage property much as they would if they were operating as a private individual. They can buy one property or several, refurbish, let or sell properties, and instruct letting agents and other professionals to perform services on the company’s behalf.
Advantages of limited company buy to let
Limited companies can claim full tax relief on buy to let mortgage interest.
Between 2017 and 2020, tax relief for buy to let finance costs will be phased out and replaced with a flat 20% reduction.
This will mean that many landlords will pay more tax on the rental income they receive. But as limited companies pay corporation tax on income, rather than income tax, the changes will not affect them. This might make them advantageous from a tax perspective.
Profits retained in the company do not attract income tax
Companies pay corporation tax on trading profits. At present, the corporation tax rate is 19%. This will fall to 18% on April 1 2020.
Income tax and NICs may be payable on any income that directors withdraw from the company as salary. Shareholders may also pay income tax on dividends (more on this below).
But it is not payable on profits retained within the company. This means that there will be more cash to re-invest, allowing limited companies to grow their portfolios more quickly.
Dividends allow business owners to exercise more control over their income.
All assets and finances belong to a company rather than its owners. This allows directors and shareholder owners to exercise more control over how much money they take from the company.
One way to withdraw money is through dividends. All taxpayers have a £2,000 tax-free dividend allowance, after which they pay tax according to their income tax band:
7.5% for basic rate taxpayers
32.5% for higher rate taxpayers
38.1% for additional rate taxpayers
You can also take money out of a company through a director’s salary, deductible expenses and a director’s loan.
It is possible to reduce tax exposure when transferring ownership
Because assets are listed in the company’s name, changing ownership can be made easier by transferring shares. Transferring ownership within the company in this way can circumvent the need to pay tax on sale profits.
This could also make it easier to gift assets to family members that are involved in the company. Be wary that doing this could give rise to inheritance tax implications. A professional tax advisor will be able to offer guidance.
Disadvantages of limited company buy to let
Running a limited company entails additional costs
Managing a property business through a limited company requires more administration, which has associated costs. This includes (but is not limited to) account preparations, auditing, company registration and legal costs.
Accountants may also charge more for their services to limited companies.
Not all buy to let lenders offer mortgages to limited companies
Limited companies have access to a smaller range of lenders and products than individual borrowers. As a result, mortgage set-up fees and interest rates tend to be more expensive for limited company borrowers.
Lenders may also impose additional restrictions. Some insist, for instance, that the director owns a majority share of at least 80% in the company. (This makes asset transfers, as described above, more difficult.)
On balance, lenders prefer applications from SPVs. Mortgages for SPVs are easier to underwrite as there is a clear relationship between assets and reliabilities.
But some lenders will also consider applications from trading limited companies.
Owners may be personally liable if their business encounters difficulty
Limited companies are so named because their shareholders have limited liability. This means that their responsibility for company debts is limited to the value of the shares that they own.
But lenders will usually ask the company’s directors and shareholders to sign personal guarantees, making them liable if their rental business falls into financial difficulty. This effectively removes the advantage that limited liability affords a company’s owners.
Limited companies are not always more tax-efficient
Corporation tax is not subject to a personal allowance like income tax. Typically, the higher the rental profits, the greater the tax savings of corporation tax versus income tax.
Limited companies also pay corporation tax when selling properties, rather than capital gains tax (CGT). The corporation tax rate is lower than the 28% CGT rate for higher rate taxpayers, but companies do not benefit from the CGT allowance that individuals have.
Speak to accountancy professional to determine whether purchasing property through a limited company is the most tax-efficient option for you.
Transferring existing properties to a limited company
Transferring an existing portfolio to a limited company structure can be more complex and costly than buying a new property through the company.
HMRC treats transfers between an individual and a company as arm’s-length transactions and taxes them as such. Thus, the individual will usually pay CGT, and the company will usually pay stamp duty on the acquisition
Additionally, there may be exit fees to pay for moving from the original mortgage product.
Whether these extra costs are justified will depend on your individual circumstances and goals. There are pros and cons to every strategy, and what works for one investor may not work for another.
1st Mortgage aim is to provide a broad view of the options and to help match our clients with the most suitable mortgage product.
For advice on tax and financial planning, be sure to consult with a professional accountant or Qualified financial adviser.