A large share of new buy to let purchases now go through limited companies, driven by tax treatment rather than by anything in the mortgage market. The lending is widely available and well established. But this is a tax decision before it is a mortgage decision, and it should be taken with an accountant.
We do not provide tax advice. What follows is how the lending works, so you can have a better-informed conversation with your accountant.
Lenders want an SPV
Most lenders will only lend to a special purpose vehicle — a limited company set up specifically to hold property, with nothing else going on inside it.
In practice that means:
- The company is newly formed, or exists solely for property
- Its registered activity codes cover buying, selling, letting or managing property
- It does not trade in anything else
A company that also runs an unrelated business is a trading company, and far fewer lenders will consider one. If you already have a trading limited company and were planning to buy the property through it, speak to us first — that is usually the wrong vehicle for lending purposes.
Your accountant will set the company up correctly. It is quick and inexpensive.
Personal guarantees
Buying through a company does not remove you from the equation.
Lenders require personal guarantees from the directors, typically covering a proportion of the loan. Your own credit history, income and existing commitments are assessed much as they would be personally.
The company structure changes how the property is taxed and owned. It does not make the borrowing anonymous, and it does not protect you from the consequences if it goes wrong.
How the lending compares
Rates. Generally slightly higher than equivalent personal buy to let, though the gap has narrowed considerably as company lending has become mainstream.
Product fees. Often larger, and sometimes charged as a percentage of the loan rather than a flat sum. On a large loan, a percentage fee can materially change which product is genuinely cheapest.
The stress test. Frequently more generous. Companies are taxed differently, so many lenders apply a lower rental coverage ratio — often around 125% rather than the 140% or 145% applied to a higher rate taxpayer borrowing personally. That can mean a larger loan on the same property. See our guide to the rental stress test.
Lender choice. Narrower than personal buy to let, but no longer restrictive. Most specialist buy to let lenders now offer company products.
Legal work. Slightly more involved and usually a little more expensive, as the lender will want the company documents reviewed.
Moving existing property into a company
This is where landlords most often expect something simple and find it is not.
Transferring a property you already own personally into your own limited company is treated as a sale and purchase. That normally means:
- Stamp duty payable by the company on the purchase
- A potential capital gains liability on the disposal
- Redeeming your existing mortgage, with any early repayment charge
- A new mortgage application, new valuation and new legal fees
The costs can be considerable, and whether the ongoing tax benefit outweighs them depends entirely on your circumstances, the size of the portfolio and how long you intend to hold.
This is squarely an accountant's question. Some landlords find it worthwhile. Many find the transaction costs eat years of benefit. There is no general answer, and we would be doing you a disservice by suggesting one.
Getting the money out
Rental profit sits inside the company. Taking it out — as salary, dividends or a director's loan repayment — has its own tax consequences.
For landlords reinvesting profits into further purchases, the company structure can be efficient because profit is retained rather than extracted. For landlords who need the rental income to live on, the calculation is quite different.
Again: accountant, before lender.
The order to do this in
- Speak to an accountant about whether a company suits your position
- If yes, have the SPV set up correctly with appropriate activity codes
- Then talk to us about the lending and which lenders suit the structure
- Then offer on a property
Doing it in that order avoids the two common problems — buying personally and wishing you had not, or setting up a company that lenders will not lend to.
Call 0116 277 7536 or see buy to let mortgages in Leicester.
More guides: buy to let guides for Leicester.
