Landlords can now invest in a buy to let property through the individual route or invest through a limited liability company (Special Purpose Vehicle (SPV) route.
From April 2020, the tax rules around buy to let have changed for individual investors. The interest they pay is no longer a tax-deductible expense. Therefore, buy to let through a limited liability company (SPV Mortgages) is becoming a popular option among day rate contractors. SPV mortgages have helped some higher rate tax bracket contractors with spare cash to utilize their company funds more tax efficiently.
However, both options have their advantages and disadvantages. Read on to the following, which provides a short guide to limited company BTL applications VS individual applications.
Will it be beneficial for contractors to borrow via a limited company?
Investing in a BTL property through a limited company can be more tax-efficient than borrowing as an individual for some property landlords. However, it is always better to seek a professional tax advisor’s advice as the benefit will differ from person to person.
The limited company buy to let applicants are assessed a bit more leniently in determining mortgage affordability. This is because the stress test the banks use is a bit more favourable towards limited companies. Generally, limited company clients eligible to borrow more than if they were to borrow on their name if they were high taxpayers. Check out our buy to let Ltd company calculator.
Limited companies do not pay income tax (They pay corporation tax). Therefore, this will make the income ratios more feasible than that of a personal BTL.
Will the processing time be longer for limited company application?
Generally, limited company BTL applications take longer to process than that of individual BTLs. If the limited company has existing properties and engaged in other trading activities, the processing time can be even longer.
One main reason for the delay is that the mortgage lender will have to carry out the checks on the individual as well as the company. They will assess the applicant’s income, the structure of the limited company, the trading purpose of the limited company.
The other reason for the applications to take longer is because most banks treat a limited company application as a commercial loan. Commercial loans need independent legal advice, and the conveyancing process may be longer.
Will it cost more to go to a limited company buy to Let
This will depend on the lender. Generally, the interest rates are higher than in an individual application. However, it would be best to consider the tax savings vs. the additional interest cost to determine the cheapest route. Often, the Limited company route works better for the high taxpayer, portfolio landlord, or contractors with significant cash reserves in the company.
Some lenders have high rates and charge high product fees on limited company applications. This is mainly because the underwriters will have to spend on the checks, top skills that the underwriting team is required to have. Of course, the risk profile is different for the limited company client. However, this is not always the case. Some lenders have the same rates for personal BTLs and limited company BTLs.
Is there any possibility to convert a personally owned BTL to a limited company?
No, a contractor cannot convert a personally owned BTL to a limited company. However, he can sell the individually owned BTL to his limited company. However, one may have to pay a capital gain tax and stamp duty on the purchase. It’s always good to check with a professional advisor or an accountant on the taxes and reliefs.
Can the contracting company invest in an SPV?
Yes, you can.
Many contractors do this. This can either be in the form of a director’s loan, commercial loan, or direct investment. Directors loan may have tax implications; therefore, check with an Accountant.
The most significant advantage in the contracting company investing in the SPV is that the shareholders don’t pay dividend tax on the investment. If they were to draw down the dividend, they might be paying 32.5% if they are a high taxpayer. Therefore, financing through the contacting company is very popular.
We at WIS, consider your priorities and circumstances, Discuss the complications with the Business Development managers of the lenders when and where it is required. As we are operating the whole market, WIS would be able to provide you with the most suitable deal comparing the market. WIS also works closely with WIS Accountancy Limited, a sister company, if ever you need assistance in tax guidance or need to file tax returns.
So, why not contact us to take you to the right option for you?
Commercial buy to let properties are not regulated by the financial conduct authority (FCA)
Your property may be repossessed if you do not keep up repayments on your mortgage.
Information is based on our understanding of tax legislation and HMRC rules as at 17 August 2021 and the legislation and rules may change in the future. The tax benefits of each option will depend on your personal circumstances.