Limited Company SPV Mortgage Guide

What is meant by investing in Buy to Let?

Buy to let as it sounds will be a property purchased in order to rent the property to tenants. Profits on buy to let can be accomplished by 2 methods as described below.

  1. Rental Yield –Rental income minus property repairs and maintenance cost
  2. Capital Growth –The increase in property price from the date of the property purchase is known as property appreciation. The amount received in excess of purchase price after selling the property

The following risks should be looked into when investing in a buy to let property

  • In a situation where there will be no tenants, clients will be liable to pay the mortgage payment
  • Decline in house prices can cause applicants to have insufficient funds to cover the mortgage in an event of a sale.
  • Rent may not be guaranteed since the amount of rent income will be effected by a range of external factors
  • The property will incur running and maintenance expenses and agent charges if an agent is used for property management

 

What are the ways of investing in Buy to Lets?

One of the most important decision on buy to let is the financing of the property. Most applicants will require a mortgage to finance the property. Investment in Buy to Lets can be done through two methods.

  1. Acquisition of Buy to Let properties through personal name
    When the property investment is made, the buy to let mortgage will be on the applicants’ name. This is referred to as buy to let properties through personal name.
  2. Acquisition of Buy to Let properties through Limited Company
    Under Buy to Let properties through Limited company, the SPV company will own the properties and the mortgage will be in the name of the company.

 

Both of the above methods have its own pros and cons. It is important to weigh the pros and cons of the investments.

Why should you invest through a limited company?

With the recent changes in tax, trend in investing in Buy to let properties through Limited Companies have continued to increase. Following points will make the investment through Limited Companies beneficial.
  • Set up of a limited company can be a simplified process as detailed below.
  • If an applicant owns more than 4 properties under the personal name, they will be classed as portfolio Landlords. This restriction will not be applicable for properties owned through Limited company
  • Property ownership can be transferred among the shareholders of the company leading to inheritance tax savings
  • In the current year 2020/2021, 100% of the mortgage interest is not allowed for tax deduction under individual tax computation. This leads to high taxable profits. However, this restriction will not be applicable to investment through Limited Company
  • If the funds are transferred between companies for deposit, there will be savings on Dividend tax
  • Companies have a corporate tax rate of 19% as opposed to individual tax rate of 40% (high tax rate payer)
  • Stamp Duty savings in Let to Buy transactions will be possible. This is because the customer will end up paying single property stamp duty for the purchase if the property is sold to Limited Company.

How to set up a Limited company?

Step 1 Choose a Company name. Please confirm with Companies house if the name can be used.

Step 2 Choose an appropriate SIC code

SIC codes are used to distinguish the main economic activity of the business. The following SIC codes are permitted for companies in to real estate;

68100 – Buying And Selling Of Own Real Estate
68209 – Other Letting And Operating Of Own Or Leased Real Estate
68320 – Management Of Real Estate
68201 – Renting And Operating Of Housing Association Real Estate

Step 3 SPV company is required to adhere to following criteria

  • Use of an appropriate SIC code
  • The revenue streams should be consisting of only property income
  • If the company has been in operation of other activities historically, and has now discontinued, there can be a limited number of mortgage Lenders who will accept the circumstances.

 

step 4 Applicants can set up the company by themselves after considering on the above steps or the Accountant will be able to help on the company creation. The process will cost £40+VAT.

Do you need solicitors?

Similar to residential and buy to let purchase and remortgage, Limited company transactions require the service of a solicitor. The solicitors will be carrying out transactions such as those mentioned below in order to ensure the completion of purchase and remortgage of properties.

  • Solicitors will need to ensure relevant capital gains and stamp duty charges and exemptions are accurately documented and followed
  • Limited companies who have existing mortgages on them, will need the permission of the existing mortgage Lenders on agreeing to a new charge
  • Both Land registry and Companies house will have to be updated on property purchase. The notification should be submitted within 21 calendar days. Failure to do so can create a void which requires court proceedings
  • Limited company mortgages require Directors to sign as personal guarantors for the mortgage. This process will require applicants to get Independent advice as well. Large solicitor firms can better assist on this process when they have multiple partners
  • Solicitors will ensure that the alternations comply with the building regulations
  • Solicitors will carry out other activities such as to ensure if AST is in place, relevant EPC standards are being met and if HMO license is required and they are in place

 

Situations where the clients will be selling their personal property to Limited Company, they will need to use the services of two separate solicitors. This is solely because of the conflict of interest that arises from carrying out the above transaction.

Do I have to pay stamp duty?

Stamp duty will be paid as a percentage of property’s total value. Investors investing through Limited Company are required to pay additional 3% stamp duty on all the properties. As per the latest stamp duty rules effective until 31st March 2021 below rates will be applicable.

Stamp Duty Rates for England and Wales

Portion of Property PriceStamp Duty Rate
£0 -£500,0003%
£500,001 – £925,0008%
£925,001 – £1,500,00013%
££1,500,000 +15%

Stamp Duty Rates for Scotland

Portion of Property PriceStamp Duty Rate
£0 -£250,0004%
£250,001 – £325,0009%
£325,001 – £750,00014%
£750,000 +16%

Do I need a separate bank account?

Since the Company and Applicant will be two separate entities, it is mandatory to maintain a separate business account in the name of the company. All the relevant transactions related to the company such as rental income, mortgage payment, property maintenance charges etc will have to be processed through the Business Account.

How to fund the deposit?

The following methods of deposits are acceptable.
  1. Savings – This is the most common and simple form of deposit. Mortgage lenders will require customers to show the accumulation of savings in the form of latest 3 months bank statements
  2. Directors Loans – Most Mortgage Lenders will accept Directors loan as a form of Deposit and will require Company Accounts and Bank Statements to evidence funds that are available to be loaned out
  3. Gifted Deposits from Family Members – Most mortgage Lenders will require the gift of deposit to be received from Family members and will require bank statements to evidence the funds and a letter stating the gifted deposit
  4. Intercompany loans – This can be restricted by most lenders. There are few lenders who will be comfortable with another Limited Company being the parent of the SPV company. If the above situation is permitted the Lenders will be comfortable with intercompany loans as a source of deposit
  5. Sale of Property – Individuals can sell a property and re finance a new property. Mortgage Lenders will require bank statement showing sales proceeds or a completion statement
  6. Inheritance – Most Lenders would accept inheritance upon receiving a letter confirming details. However, inheritance and probate can cause delays in the process
  7. Deposits from overseas – This will be down to Lender’s discretion. However, most of the time if the funds meet the standards of Financial Action Task Force it will be acceptable.

How to secure a Limited company mortgage?

As with any other mortgage, applicants will be entitled to receive fixed, variable, tracker or discounted mortgage deals from the market. With the increase in trend of Limited company mortgages, there is an increase in the availability of mortgage deals in the market.

However, lenders will have their own criteria that will have to be adhered into. Following depicts few criteria lenders will look into. However, it will be ideal for clients to talk to us on their individual circumstances so that we can cater to their needs in the most suitable manner.

 

  • Lenders can have restrictions on the shareholding structure. Most lenders will require individuals as Directors and shareholders in the company. However, there can be few lenders who will be comfortable to have another limited company as a shareholder
  • Lenders can have restrictions on the type of properties invested such as new build, freehold flat, refurbished buy to let properties etc. There can be few buy to let lenders who will be comfortable with the above properties
  • The type of deposit can be restricted as well. This is explained earlier.
  • Most lenders can have restrictions on HMO properties

How will the income be assessed?

Even though the property is purchase through a limited company, mortgage lenders will focus on the Directors and shareholders and their income criteria for mortgage underwriting process.

Most of the lenders have a minimum income threshold of atleast £25,000. However, there can be few lenders who will have no minimum income threshold.

For self-employed applicants, lenders will require 2 years tax returns and overviews as an evidence of income. For employed applicants, lenders will require latest 3 months payslips and P60.

If the SPV has been established, lenders will require company accounts. As with normal buy to let applications, the property will need to meet the stress test requirement as well.

What is a deed of Postponement?

There can be few Limited Company mortgage Lenders available who will request for a Deed of Postponement for Limited company mortgages. Deed of Postponement will be used to postpone the 2nd charge. This means that the mortgage in the process of setting up will receive the First Charge and Second charge will remain as it is.

What happens after the mortgage is approved?

Once, the mortgage lender approves the mortgage, they will issue the mortgage offer to respective parties. Once the offer is issued, solicitors will carry out their share of responsibilities in the property purchase process such as carrying out searches, carrying out title checks, registering the mortgage etc will be carried out.

Once the procedures are completed solicitors will decide a completion date where the funds will be transferred between relevant parties and applicants will possess the property.

How can WIS help you?

At WIS we look at whole of market and select the most suitable deal based on client priorities and circumstances. We discuss the individual circumstances with Business Development Managers when it is required and strive to obtain most suitable deals.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.