After recent tax changes the popularity of purchasing investment property into a limited company has risen. This is a niche area we can guide you through. This is a complex area. However, there is an active market in these kinds of purchases and a general consensus among lenders on how this is done. This has made the process standardised to a point, it may not be as complex as you think.
In most people’s minds, a limited company is a legal structure set up by an accountant to hold a business. Let’s say your local mortgage broker has been operating for two years as a one-man-band. He’s probably been operating as a sole trader, meaning there is no legal difference between him as a person and his business, they are one and the same. Let’s say things are going well for him and he decides to take on staff, he may at this point incorporate as a limited company. A limited company is its own separate entity. There is now the person and the company, the two are separate. The broker will need to transfer whatever assets the business needs to operate into that structure. The company will start to build its own credit score and can begin to borrow money on that score’s strength.
Sometimes, limited companies can be set up to hold one specific asset or bundle of assets. This is called a ‘Special Purpose Vehicle’ or ‘SPV’. Many people buy houses into SPVs, if you were buying a house on Kings Road you may decide to set up ‘52 Kings Road Limited’ to hold that property.
There’s a common misconception that limited companies need to have been trading for some time before owning property. You can buy property into a currently trading company if you want, but most people don’t.
Most clients are attracted to limited company mortgages because the tax treatment of property in a limited company is different to that held in a personal name. We are not accountants, so cannot advise on whether your situation justifies this route. However, we can say in very general terms when you buy property into a limited company, you pay tax on the difference between the mortgage and the rent.
Whereas, when you buy property in personal names you have to pay tax on the full amount of rent. This can be a large difference.
Limited Company mortgages can be more flexible on a few points:
-Rental affordability calculations can be easier to meet.
- There can be less restrictive measures on the applicant’s age at the end of the term. Some limited company lenders will go up to 120 years old at the end of the term, whereas personal name lenders generally ask for 75-80 years old at the mortgage’s expiration.
-Those without a deposit
-Those without any earned or investment income
First time buyers
First time landlords
Holiday let mortgages
Up to 85% loan-to-value
Limited company mortgages mimic the same process as normal buy to let mortgages with a few variations. Limited company applications are ‘double underwritten’, meaning that the lender first checks you as an individual and then checks the company itself. Here is an outline of the process:
Initial Call - First give us a call, we will be able to talk in general terms about your options and select a route forward. This takes around 15 minutes.
Research - Next we will research your case in detail, we usually request documents at this stage. This can take between 1-3 days depending on the complexity of your situation. This is the most important stage of the process, it is imperative we correctly place this case so the application runs smoothly.
Quote - We will provide a formal quote of the available interest rates and fees.
DIP - We then apply to the lender for a Decision in Principle. They credit check you and give agreement to the fundamental details of the case.
Full Application - Then the full application is submitted. Further details are provided to the lender, documents submitted and the valuation is instructed.
Offer - Once the valuation has been carried out and documents checked, the mortgage offer is issued.
Legals - The mortgage offer is passed to the solicitor who will complete legal works and see the case through to completion.
Development finance is a product that can offer you funds for the purchase of the chosen property and the renovation or build costs.
While many people find the tax advantages for limited company purchases attractive, it is not necessarily the case that it is in your favour to purchase this way. We would always recommend speaking to an accountant before progressing with a limited company purchase.
It is important to have a deposit saved for a limited company purchase. Lender’s need to know that you have some ‘skin in the game’. Also, should property prices fall your deposit will act as a buffer. If you bought a property for £200k with a £50k deposit and the property dropped in value by £10k you would still have £40k of equity in the property. Nobody wants to owe more on their mortgage than the property is worth. This is called ‘negative equity’. There are investors online who recommend borrowing your deposit from an investor. Some bridging lenders are comfortable with this for the short term, but no mortgage lenders will accept loans as the source of deposit.
All limited company lenders will require you to have some form of income in addition to the rental income from the property. Usually this is earned income, but investment income from other properties is also acceptable. The lenders need to know that, should that property be vacant, you will be able to pay the mortgage from other sources for say two to three months. These mortgages are therefore not suitable for anybody out of work and without investment income.
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