Particular interest has centred on setting up limited companies to manage rental income. Many warnings have been given about this procedure, but for landlords who are higher rate taxpayers and have, or plan to have, a substantial property portfolio, it makes sense. The corporation tax attracted by a limited company is considerably lower than higher rate income tax, and there are other financial advantages.
High street lenders have been wary of this market, so initially the number of lenders offering mortgages to limited companies was small. With a limited product range, interest rates tended to be high. As demand grows, more lenders are coming into the field, and the interest rates on these mortgages may come down.
The easiest option is to set up a Special Purpose Vehicle (SPV) limited company, a company that trades only in rental property. Here’s more information on how to set up a limited company. You can either register your company yourself or ask your accountant to do it for you.
It’s worth remembering that, since the newly formed SPV will have no accounts, the lender will initially demand that the directors and majority shareholders guarantee the mortgage personally. However, since lenders find mortgage applications from SPVs easier to underwrite than applications from other limited companies, there are more options available, making the market more competitive.
At first sight it would seem logical to add your rental properties to a limited company that you already own. However, mortgage advisors are experts only in the property business. Before they will approve a mortgage for your limited company, they have to ascertain the risks associated with the other trade in which your company is involved. Since relatively few lenders are willing to make this effort and take on a new risk, the price of these mortgages tends to be high, and you may not end up with the best deal.
Rental property that you already own personally cannot be transferred into the limited company. Legally, you, as an individual, have to sell it to the company. Unfortunately, this procedure will attract both Capital Gains Tax and Stamp Duty.
With the market in buy-to-let mortgages for limited companies expanding, more and more comparison websites are coming along.
As always, it’s vital to check your own position with the professionals. With years of experience helping landlords maximise their assets, we’d love to hear from you and help you find the best solution for your personal property situation. Get in touch.