At TBMC, we have seen a significant rise in the number of limited company buy-to-let applications being submitted. Since the beginning of 2019, over 25 per cent of new business each month has been in the name of a Special Purpose Vehicle or trading company.
This comes as no surprise as there are several benefits to using a corporate structure for running a buy-to-let property business. Many landlords opt to use an SPV as it can be financially advantageous and tax efficient. Since the government announced the phasing out of mortgage interest tax relief by 2020, there are now more reasons to consider the limited company route to reduce tax liabilities.
In terms of buy-to-let mortgage options, limited company products can also provide advantages to landlords as the PRA regulations relating to rent stress tests are not applicable. This means that the rental calculations can be more achievable for SPVs – typically at 125 per cent at 5 per cent or at the pay rate for 5-year fixed rates – which may allow applicants to borrow more through a corporate structure.
There is growing competition in the limited company buy-to-let space - TBMC has around 30 different lenders on its panel - which means that there are some keenly priced rates available. Historically, limited company mortgages were considerably more expensive than personal name rates, but the gap is closing with some lenders now offering the same rates for both applicant types.
Setting up an SPV is a simple, cheap process which can be completed online within 24 hours via Companies House. Most lenders will lend to newly established SPVs providing they are set up for the sole purpose of letting and managing property. For this reason, it is important that the limited company is registered with the correct SIC code – normally 68100, 68209, 68320 or 68201.
Some buy-to-let clients choose to apply via a company that trades in some other business besides property. There are options for trading company mortgages,but the choice of lenders is reduced for this scenario.
For existing landlords who are considering transferring their properties to an SPV it is always recommended that they seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable.
Stamp Duty costs may be a deterrent to large portfolio landlords,but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again tax advice is recommended in this scenario.
It is possible that the proportion of buy-to-let mortgages arranged via SPVs and trading companies will continue to grow over the next 12 months as landlords realise the financial ramifications of the changes to mortgage interest tax relief once it is phased out completely in 2020.
This area of buy-to-let presents a good opportunity for brokers to help their landlord clients and doesn’t need to be complicated. Limited company mortgages are processed in the same way as personal name mortgages and may provide advantages for buy-to-let investors.