Before purchasing a buy to let through a limited company I strongly recommend speaking to an accountant / tax advisor, as everyone’s tax situation is different. If you would like the recommendation of an accountant, please don’t hesitate to ask me as the below information is not advice.
With the recent changes to taxation if you are a landlord in the higher rate income tax threshold: https://www.gov.uk/income-tax-rates then you will be subject to a change in the tax relief you get on your mortgage payments: https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords
This restriction of relief on mortgage payments currently doesn’t apply to limited companies hence why the interest in purchasing buy to lets through a ltd company.
Steps to purchasing a buy to let through a limited company
You need to incorporate a limited company. This can be done online or through an accountant
To set up a private limited company you need to register with Companies House. This is known as ‘incorporation’.
Simply enter the name you would like to use to see if it is available. For example, if you put in ‘ABC Property’ you will see that there was a company that is now dissolved number SC29473 which means you could have this name if there isn’t a currently active company. Which unfortunately there is number 07730507. You could have at the time of writing this page have however ABC Investment Property so adding some additional words can help. Don’t use obvious trade names though i.e. ‘Barclays Investment Property’ will surely get you in hot water
- an address for the company
- at least one director
- details of the company’s shares – you need at least one shareholder
- A SIC code – this identifies what your company does. The SIC code you need for a property SPV (Special Purpose Vehicle) is 68209 – Other letting and operating of own or leased real estate. You can also add 68100 – Buying and selling of own real estate as well but Limited Company mortgage lenders will not want to see anything more than this. You cannot run any other business through this limited company from the lender’s requirements. If you have an existing ltd company business, you can set up the new limited SPV business as a subsidiary to transfer the deposit etc.
You’ll also need:
- shareholders to agree to create the company and the written rules (known as ‘memorandum and articles of association’)
- details of people with significant control (PSC) over your company, for example anyone with more than 25% shares or voting rights
Step 2 – Business Bank Account
Once your company is formed you will need to open a business bank account. Your deposit and future rent receipts and mortgage payments will need to go through this account.
Step 3 – Put Deposit in a Business Bank Account
The deposit can come either from yourself as a director, a shareholder or a parent company. If from yourself as director / shareholder, then the deposit would be entered in your company accounts as a director’s loan. For money laundering the source of the deposit must be clear, and there must be a connection to the business. Much like a residential mortgage the deposit cannot be an unconnected persons loan to the business.
Step 4 –Limited Company Buy to let Mortgage
This is where I can help to find the most cost-effective solution for your circumstance. Limited Company Buy to let mortgages are generally more expensive than personal Buy to let mortgages. The good news however is that the rates are pretty much the same for HMO mortgages so worth considering the limited company approach if you are thinking of investing in this area and expect to grow your portfolio.
Apart from the higher rate the application for a Limited Company Buy to let mortgage is very similar to a normal BTL mortgage. The affordability of the loan / maximum that can be borrowed, will be based upon the rental income received. Loan to values are also similar, usually requiring a minimum of 25% deposit. These can be as low as 15% deposit however, if the rental is excellent such is in an HMO.
The director’s personal finances will be looked at for credit worthiness and all other properties will need to be declared and be self-funding (i.e. rents cover all mortgages)
The lenders will ask for a personal guarantee from the director. This means that if the company cannot afford to pay the mortgage the lender can come after the directors and their personal assets if needs be to satisfy the loan. Some lenders will make sure you have had legal advice to ensure you understand your responsibilities of signing this personal guarantee. This signing of the personal guarantee is why the lenders are more concerned with your personal finances than the SPV Ltd company that may not have even traded before this property purchase.
Step 5 – Stamp Duty for Limited Companies
Even if the purchase is the first purchase within the limited company the additional 3% rate applies unfortunately. https://www.gov.uk/guidance/stamp-duty-land-tax-buying-an-additional-residential-property#comp
In short, Companies must pay the higher rates for any residential property they buy if:
- the property is £40,000 or more
- the interest they buy is not subject to a lease which has more than 21 years left
Step 6 – Filing tax and companies house reports
Once you have incorporated your limited company and are hopefully making profits from your limited company then you will have to file separate tax returns for company to HMRC paying corporation tax ( which is generally lower than income tax) https://www.gov.uk/corporation-tax-rates
You will also have to file annual accounts to Companies House along with a confirmation statement that nothing has changed i.e. shareholdings, directors etc if it has these needs amending
Step 7 – Taking money out of the limited company
This requires tax advice based on your personal tax situation but in general. Any money in the directors’ loan account (i.e. the money you leant the business can be withdrawn without tax implication to yourself)
Any profit, after tax has been paid, can be withdrawn as a dividend. The amount of the dividend is dependent upon the individual’s shareholding. i.e. if the ltd company has 2 shareholders (husband and wife) 50% and 50% owners and the company makes £5,000 post tax then they can each take a maximum of £2,500 each.
The wife for example can’t take personally the whole £5,000. The husband can abstain from taking his dividend at this time however and leave the money within the business until a more tax efficient time (retirement for example)
Dividends are subject to a different type of personal tax but are connected to an individual’s personal income tax situation.