Buy to Let FAQ’s
How will the tax change on mortgage interest affect me?
According to the chancellor the investment property tax changes will “make it a level playing field for property investors”. Whilst this is true in that High Rate tax payers’ relief will be brought into line with low rate tax payers, it would also appear to benefit the treasury somewhat.
Currently basic rate tax payers get 20% tax relief whilst high rate and top rate get 40% or 45% tax relief respectively. When the changes are fully in place (from April 2020) the tax relief will be at a flat rate of 20%.
To help the high rate tax paying landlords to adjust to the changes, they will be phased in over the next few years at 25% per year starting in the 2017/18 tax year.
The HMRC has a website dedicated to helping landlords understand their tax obligations and includes several examples. Click on the following link for more details. Income tax when you let property
Is it possible to borrow via a limited company?
This is a question I am asked regularly & my advice is always to seek professional tax advice before you make any property investment decisions.
On the face of it the corporation tax is significantly lower than high rate personal tax, however there are many factors that only a specialist can guide you on including what happens to the profits the company makes and what will the capital gains tax implications on selling the properties.
Another major consideration for low yielding properties is that limited companies are not subject to the stricter affordability checks on personal BTL borrowing which was introduced by the Prudential Regulation Authority on 1 January 2017. This means that, in general, they can borrow more against a subject property than a landlord borrowing personally. Most lenders work on debt affordability ratio of 145% for individuals or 125% for limited companies which can affect the loan to value a lender will feel comfortable with.
What will be the tax implications of borrowing through a limited company?
As indicated above, Limited companies pay Corporation Tax, not Income Tax. As the tax changes relate to Income Tax a Limited Company is not affected by the changes to tax relief on finance costs for personal Buy-to-Let borrowers. However. Any landlord considering this option will need to speak to a professional tax advisor as the profits are unlikely to sit in the company forever and at some stage the shareholders will want to take some income which may incur income tax on salary and / or dividends.
What is the difference in processing time for a limited company?
Most lenders consider a SPV limited company to be an extension of the individual. This means that even newly formed limited companies can borrow & applications take a similar time to process. Background checks will always be carried out on the individual & this also applies to the directors and in some situations the shareholders. Where the borrower is looking to use an existing trading company the number of lenders accepting applications is reduced and there will need to be additional checks on the company which will take a little longer.
Do lenders charge more for Limited company mortgages?
It depends!! Some mainstream lenders do not offer mortgage products to SPV or trading companies and others who may have attractive rates do not offer interest only products. Most specialist lenders offering interest only products to both SPV limited companies and individuals offer the same rate or very similar rates.
A few lenders who offer BTL mortgages for trading limited companies charge a higher interest rate as the applications and ongoing monitoring require a higher level of underwriting skill and can carry a higher risk profile.
In general, 95% of the SPV limited company products we place are at the same or very similar rate to those offered to individuals.
Why can I borrow more via a limited company than personally?
Following the changes to income tax relief on finance costs being phased in between April 2017 and April 2020 the Prudential Regulation Authority (PRA) introduced new guidelines requiring lenders to tighten affordability checks on buy to let landlords borrowing personally. In general, the affordability ratio increased from 125% to 145% (the amount of surplus rent after ALL property related costs and personal drawings over the finance costs). As Limited companies do not pay Income Tax so the new guidelines do not apply which means that lenders can still work on 125% income ratio cover. On low yield properties in particular this can affect the loan to value ratio the lender will offer.
Do lenders look at SPV limited companies and Trading Limited companies the same way?
Most lenders would consider an SPV limited company as an extension of the individual as the “SOLE” purpose of the SPV company is for investment property transactions. Some lenders are not experienced in assessing the financial standing or performance of a trading limited company and do not offer products to this type of company. As there are more lenders offering finance to SPV limited companies that trading limited companies there are more options available and therefore a greater choice of interest rates and terms.
What’s the difference between an SPV and a trading limited company?
A Special Purpose Vehicle limited company is a legal entity set up for the purpose of holding property only, whereas a trading limited company’s main purpose is to run a business which could be in a totally unrelated sector.
How do I form a SPV limited company?
If you are seeking professional tax advice it is likely that your accountant would set one up for you. Alternatively, you can set one up yourself online at Companies House.
If you are happy completing forms online yourself, setting up an SPV online is easy and inexpensive. The cost is around £15. Full details can be found at Gov.uk – Companies House forms for Limited Companies
Can I borrow through a new SPV?
Yes. Lenders acknowledge that a SPV has been formed to hold investment properties for the directors / shareholders and as such treat the underwriting based on the individual’s circumstances. Lenders will require that directors and majority shareholders where relevant provide personal guarantees. We would always recommend that you speak to your solicitor if you have any questions regarding personal guarantees and they will explain the potential implications of the guarantee.
I have a number of BTL properties in my own name. Can I transfer them into a new SPV Limited company?
No. Under the eyes of the law you and your limited company are separate legal entities. If you want to move your properties to a limited company, you will have to sell them to the company and could be liable for capital gains tax etc. Should you decide that this is the best option for you the transaction is considered as a transaction between related parties. Most BTL lenders, but by no means all, who lend to limited companies, will consider related transactions provided the transaction is completed at the correct market price.
As the proceeds of the sale to the limited company could be a taxable event you may have to pay Capital Gains Tax on the sale as well as stamp duty (SDLT) including the 3% surcharge on the purchase by the limited company.
It may be possible to roll over capital gains into shares in the limited company and in some cases the Inland Revenue will look at the tax position if you can demonstrate that you are a professional landlord. We would recommend that you speak to your accountant or solicitor as soon as possible if you are considering moving properties you already own into a limited company.