A limited company buy-to-let mortgage is a financial arrangement where a property investor purchases real estate. They do this to rent it out through a limited company rather than as an individual. This type of mortgage is designed specifically for investment properties and offers certain advantages, particularly in taxation.
Instead of the rental income being taxed at personal income tax rates, it is subject to corporation tax. This can potentially result in lower tax liabilities for the investor.
Further, they are typically sought after by property investors looking to optimize their tax efficiency and manage their investment portfolios within a corporate structure.
What Are The Eligibility Criteria For Limited Company Mortgages?
The eligibility criteria for obtaining a limited company buy-to-let mortgage closely mirror those of traditional buy-to-let mortgages. Here’s a breakdown of the key factors:
Deposit
When applying for a limited company buy-to-let mortgage, prospective borrowers should be prepared to provide a deposit. Typically, this deposit ranges from 20% to 25% of the property’s purchase price. However, certain lenders may impose higher deposit requirements, often reaching up to 30% or more.
Rental Income Assessment
Lenders assess the property’s rental income to ensure it can sufficiently cover the mortgage repayments and associated expenses. Generally, lenders require the projected rental yield to be at least 125% of the monthly mortgage payments. This ensures that landlords can manage any unforeseen costs and maintain profitability from the investment property.
Personal Income Verification
Directors of the limited company may be asked to demonstrate a suitable personal income level. This serves as a financial safety net in case rental income fluctuates or falls short.
Alternatively, proof of personal savings may be accepted instead of a minimum income requirement. This step provides lenders with additional assurance regarding the borrower’s financial stability and ability to fulfill mortgage obligations.
Credit History Evaluation
Lenders conduct a thorough assessment of both the borrower’s personal credit history and the credit history of the limited company. Some lenders may overlook minor adverse credit events, but severe negative credit history could significantly affect mortgage approval chances.
Further, maintaining a positive credit profile is essential for demonstrating financial responsibility and enhancing eligibility for favorable mortgage terms.
Age of Directors
Some lenders may consider the age of the company directors during the mortgage application process. Borrowers nearing retirement may encounter challenges, as lenders prefer directors with alternative income sources to cover mortgages in retirement.
However, lenders may be willing to make exceptions if borrowers can provide evidence of sufficient income or assets to support the mortgage repayments. This extends beyond retirement age.
Other Property Ownership
Borrowers with four or more properties, or through a Special Purpose Vehicle (SPV), may face heightened scrutiny from lenders, especially high-street ones.
In such cases, borrowers may need to seek out lenders specializing in portfolio landlord mortgages to secure financing. So, these lenders are often better equipped to assess the borrower’s entire property portfolio and make lending decisions based on a broader financial picture.
Company Purpose and Incorporation
The limited company must be established with the specific purpose of purchasing, selling, or managing property.
Additionally, some lenders may not impose a minimum requirement for how long the company has been incorporated. Others may prefer companies with a longer operating history. This demonstrates stability and reliability in property investment endeavors.
Set Up a Limited Company
Most lenders require a limited company specifically set up for buy-to-let purposes, known as an SPV. This ensures the company’s activities are focused on property investment.
Register your SPV with Companies House, the official registrar for companies in the UK. This involves choosing a company name, appointing directors, and registering a business address.
Appoint directors and shareholders. You can be both a shareholder and a director. Select the appropriate business category (SIC code) related to property investment.
Common codes for buy-to-let SPVs include:
- 68100: Buying or selling properties.
- 68209: Letting or operating leased properties.
- 68320: Property management.
- 68201: Renting or running housing association properties.
Secure Professional Advice
Limited company buy-to-let mortgages are specialist products, and using a broker can be extremely helpful. They can search lenders on your behalf, compare rates, and guide you through the application process.
Running a limited company involves tax and accounting complexities. Consulting an accountant can ensure your company is set up correctly for buy-to-let purposes and that you comply with all regulations.
Create a Business Bank Account
Set up a business bank account for your limited company.
Register with HMRC
- Register the company with HMRC for Corporation Tax.
- Understand the tax implications of owning a buy-to-let property through a limited company.
Eligibility Criteria
To qualify for a limited company buy-to-let mortgage:
- The majority shareholder must have a minimum personal income of £25,000 per year.
- You should be looking to expand or remortgage your property portfolio (up to three residential lettings).
- Your business must be a limited company or limited liability partnership.
Mortgage Application
Apply for a buy-to-let mortgage for your limited company. Lenders will assess affordability based on the company’s rental income. The property rent should cover around 125% of the mortgage interest.
Approach Suitable Lenders
Not all lenders offer limited company buy-to-let mortgages. Your broker can help identify lenders who accept your company structure and property type.
Lenders will assess your application based on factors like company financials, rental income coverage (often around 125% of mortgage interest), minimum property value, and loan-to-value ratio (maximum loan amount compared to property value, typically capped at 80%).
Tax Efficiency and Planning
Owning properties through a limited company offers improved tax efficiencies. Corporation tax rates are often lower than personal income tax rates. Interest relief on mortgage payments is fully deductible.
What Are The Advantages Of Buying A Buy-To-Let Property Through A Limited Company?
Buying a buy-to-let property through a limited company presents numerous advantages, especially for investors seeking tax efficiency, asset protection, and strategic financial planning. Here’s an expanded breakdown of the key benefits:
Lower Tax Rates
By operating through a limited company structure, rental profits are subject to corporation tax, which currently ranges between 19% and 25%. This tax rate is typically lower than personal income tax rates, which can be significantly higher, especially for higher-rate taxpayers.
As a result, investors can retain a larger portion of their rental income, enhancing overall profitability.
Finance Cost Offset
Limited companies have the advantage of offsetting all mortgage interest and other allowable finance costs against rental income before corporation tax is applied. This deduction effectively reduces the taxable profit derived from rental properties. It offers significant tax savings compared to individual landlords who have experienced recent restrictions on tax relief for mortgage interest.
Profit Retention for Growth
Retaining profits within the company enables investors to reinvest earnings into expanding their property portfolio. By avoiding immediate taxation on profits, investors can deploy capital more efficiently to acquire additional properties, thereby accelerating portfolio growth and wealth accumulation over time.
Limited Liability Protection
One of the most notable advantages of conducting property investment through a limited company is the inherent separation between personal finances and business assets.
In the event of issues or liabilities arising from the property. For example, tenant disputes creditor claims, and personal assets are generally shielded from legal action. This provides a layer of protection for personal finances and assets.
This limited liability protection offers investors peace of mind and safeguards their personal wealth from potential risks associated with property ownership.
Easier Inheritance Planning
Transferring ownership of buy-to-let properties held within a limited company is often simpler and more cost-effective than transferring individual properties.
By transferring shares in the company to family members, investors can facilitate smoother inheritance planning and succession. This can potentially minimize inheritance tax liabilities. Additionally, it ensures the seamless transfer of assets to future generations.
What Are The Disadvantages Of Buying A Buy-To-Let Property Through A Limited Company?
The disadvantages of buying a buy-to-let property through a limited company include:
No Capital Gains Tax Allowance
Limited companies do not benefit from the Capital Gains Tax (CGT) allowance that individuals receive when selling a property. This means that all profits from property sales are subject to corporation tax, potentially resulting in higher tax liabilities.
Additional Costs and Administrative Burden
Operating through a limited company incurs additional costs and administrative tasks compared to individual ownership. This includes expenses such as preparing accounts, filing at Companies House, paying corporation tax, and potentially annual auditing.
So, the complexity of managing a company structure may also require professional services, adding further costs.
Higher Mortgage Rates
Limited company buy-to-let mortgages often come with higher interest rates and fees compared to mortgages for individual landlords. This can reduce profitability and impact the overall return on investment.
Limited Lender Choice and Mortgage Availability
Limited lender choice and reduced mortgage availability for limited companies are primarily due to lenders perceiving these mortgages as riskier. Limited companies may lack established credit histories, making it harder for lenders to assess their financial stability.
Additionally, the corporate structure adds complexity, which some lenders may prefer to avoid. This results in stricter underwriting criteria and higher administrative costs for lenders, leading to fewer options for limited company borrowers.
Double Taxation
Profits generated by the limited company are subject to corporation tax. If funds are withdrawn from the company for personal use, additional taxation may apply, such as income tax or dividend tax, resulting in double taxation and reducing the overall income available to the investor.
Limited Flexibility
Selling a property held within a limited company can be more complex and costly compared to selling as an individual. There may be tax implications to consider, and restrictions on profit extraction can limit flexibility in accessing funds from the company.
Not Always Suitable for Small Portfolios
The benefits of operating through a limited company may not outweigh the costs and complexities for investors with small buy-to-let portfolios or those in lower tax brackets.
Transferring Existing Properties
It can be a complex and expensive process. Investors may incur additional expenses, such as stamp duty charges, legal fees, and valuation costs when transferring property ownership from personal to corporate ownership.
Furthermore, transferring properties into a limited company may trigger tax liabilities. These can include capital gains tax or stamp duty land tax, depending on the circumstances of the transfer.
These costs and complexities should be carefully considered and evaluated against the potential benefits of operating properties through a limited company. This should take into account the investor’s long-term financial goals and tax planning strategies.
Investors should seek advice from tax advisors, accountants, and legal experts to understand property ownership structures’ implications and make informed decisions.
FAQ’s
Can I live in a property owned by my Ltd company UK?
A Yes, you can live in a house owned by your limited company, but it’s not recommended. If you don’t understand tax and how mortgages work, you may want to consult a mortgage advisor before purchasing a property through your limited company for personal occupation.
What does APRC mean?
APRC stands for Annual Percentage Rate of Charge. It is a measure used to show, as a percentage, the annual cost of a mortgage over its lifetime. The APRC incorporates all relevant charges, including fees, related to mortgage borrowing.
Final Words
Choosing a limited company buy-to-let mortgage is a smart move for property investors. It makes taxes easier, protects your money, and helps with planning for the future.
So, by using a company, you can grow your property business faster and keep your finances safe. It’s a straightforward way to make the most of your investments while keeping things simple and secure.
