Limited or LTD Company Buy-to-Let Mortgage Advice
LTD company Buy-to-Let Mortgages Explained
Most buy-to-let mortgages are intended for the ownership of the property to be in the personal names of the borrower i.e. you.
So, a normal buy-to-let mortgage doesn’t allow for a private company to buy properties to let. Commercial mortgages are designed for this, but they often have more restrictive terms.
LTD company buy to let fills the space between those two markets, offering slightly more competitive terms and fewer restrictions than commercial mortgages, but less competitive than traditional buy-to-let loans.
They allow you to benefit from certain tax advantages that could make this method of investment better for some clients, but the typical mortgage costs are greater so careful consideration and expert advice should be sought before you decide how to arrange the ownership as changing this later can be very costly.
The key advantages of company ownership of buy-to-let property
The tax differences for LTD companies are how most people come to hear about this option. Limited Companies can still offset the mortgage interest as an overhead and deduct the cost of maintenance at full value.
But the company must pay corporation tax on profits, and income is potentially further taxed again when drawn from the business, in most cases where the landlord has other income.
Corporation tax is considerably lower though than the higher rates of income tax and profits can be “rolled up” inside the business, making LTD company buy to let a novel solution where the properties are seen as a potential source of income in retirement.
One frequently overlooked difference is the limitation of legal liability. Essentially, you, the company shareholders and directors have more limited legal and financial liability in the event of the company failing.
Whilst many lenders will request directors guarantees which do mean some assets such as your main residence could become liable in default, there is still more separation of liability.
If you are weighing up which way to arrange a buy to let we can help provide further guidance on whether you should opt to buy property as a company owner or private landlord, but don’t simply base your decision on what you read online.
Who should choose a LTD company buy-to-let mortgage?
This is a question you absolutely must seek professional advice over, as it is really about your long term goals, the likely expansion of the portfolio, how you are likely to trade, the type of tenants you seek, how you intend to take the income from the business and what other income and liabilities you have.
If someone is providing a generic answer to this question for you, without knowing your full circumstances it is questionable whether you should take their advice.
But here are some basic principles. Make sure to give us a call though to discuss your circumstances.
Firstly, people who are already higher rate taxpayers and are more interested in building a portfolio to provide for them later in life rather than taking the income today are more likely candidates for LTD company buy to let due to the various tax advantages.
Those people who see being a landlord as their future long-term profession may also find that the traditional buy-to-let market is geared more towards people who see buy to let as a side-line.
Lower rate and basic rate taxpayers who are occasional landlords or perhaps letting a property shorter term have a far weaker case for considering this route in general.
Most short-term transactions are also likely to face more overheads and costs for company registration, higher rates and fees, and accountancy costs etc than are merited where a property is only to be sold a couple of years later.
How limited company buy to let differs to traditional BTL mortgages
Compared to standard buy-to-let mortgages, there aren’t great criteria advantages and so there is little reason to opt to own buy-to-let property in a company purely to take advantage of greater lending flexibility.
But compared to commercial mortgages, which were the main route for company ownership of BTL’s until a few years ago they are much more flexible.
Commercial loans generally required payments towards capital and interest each month reducing upfront returns and they were usually arranged over a shorter term as well and this further compounded the problem.
Deposit requirements on commercial mortgages tended to be greater too and more emphasis was placed on the experience of the landlord, the existence of business plans etc.
SIC Codes and special purpose vehicles or SPV
When the legal application to register a company is made at Companies House, you must list “SIC codes” that specify the commercial activities of the company and that establish the correct accounting rules for the organisation.
Most mortgage lenders use this as a way of establishing the difference between a company set up purely to operate as a landlord which they refer to as a “special purpose vehicle”, and a company that is dabbling in this activity which they will often call a “trading company”.
You will usually pay significantly more to mortgage a property in the ownership of a trading company than an SPV, so if you have another business it would not generally make sense to own a buy-to-let property under that company in the long term especially if an expanding portfolio was the game-plan.
So, care needs to be taken to set up the company correctly, we can liaise with your accountant to guide you on how to do this correctly for your intended trading goals to avoid costly errors.
Transferring properties into a company
Transferring properties into the company’s ownership (or out of it) effectively counts as a sale of the property and must legally be at full market value, and subject to stamp duty and capital gains tax if applicable etc.
This means that whatever method of ownership you choose for a buy-to-let property it’s not something you should take lightly and needs to be the right solution long-term. Otherwise, the costs of transfer could well erase any profits.