Limited Company Buy to Lets - Frequently Asked Mortgage Questions

Good morning guys, it's Dan and Kye here again from Crescent Mortgages coming to you one with one of our FAMQ's - frequently asked mortgage questions. And today we're going to be covering the topic of purchasing a buy to let through a limited company. Before we get started as always if you can like the video, subscribe to the channel, we're obviously doing our best to to grow it and any questions leave them in the comments or contact us directly.

Kye why don't you kick things off? Where do I start? So it's something that's become more and more popular over the last five, six, seven years because mainly because of some tax and rule changes with buy to lets, and if you're watching this then there's a good chance you're looking for answers on it. So often people purchase through a limited company because there are big tax benefits and that, in short, that is the big reason.

Now we normally talk pros and cons don't we, I mean that's buying through a limited company that's that's pretty much the main and only pro, is that it is, or it can be, again depending on your details, there can be a big tax benefit and we probably have to also add in that we obviously aren't tax advisors, so we can't give you said advice on the tax itself, but it wouldn't surprise me if an accountant you've spoken to, maybe a friend who has property, tax advisor, a lot of them will tell you to do it this way, do it this way, and there are certainly many times when it can work, but there are a few things that people forget.

Yeah so you do have to weigh it up. We have people contact us that they're so caught up in the tax saving that they do forget about the potential cons. Now we're not saying that it's a bad option, for some people it is the right option but you just need to make sure that you weighed everything up.

So I guess if we just jump into it then, so we've covered the pros, basically the the the tax liability. Moving onto the cons? The main con I would probably say, they kind of go hand in hand, you're limited to lenders, specialist lenders 10 -15 maybe in the UK, maybe a few more.

You're basically ruling out the high street, or the majority of the high street, there are one or two buy to let high street lenders if that makes sense, which you maybe haven't heard of.

A hybrid?

Yeah, a little bit I suppose but they they are in that space and maybe lenders will get more and more in that space and it will help, but you are going to be limited, you aren't going to get the stellar household names that might have the best interest rates.

Regardless of whether more high street lenders come into this market or not, generally if they do they're going to have specialist products for purchases through a limited company, so moving on to the next point is that a limited company mortgage will be more expensive than a standard buy to let purchase or remortgage, so you're generally looking at higher interest rates and normally higher arrangement fees as well, and sometimes significantly higher, it's not unusual for these sorts of products and sorts of lenders to have percentage arrangement fees, often two and a half percent so even on a small £100,000 mortgage.

That's an easy one!

Exactly because I picked the easy one, because I don't want to do this live... but you're gonna get £2,000 - £2,500 and it could be more which is a pretty standard fee potentially.

That's not to say there aren't some that do have lower fees but again the ones with the lower fees possibly could have higher interest rates to balance that out.

Yeah it's quite rare you get fee free product, but when you do there's a big jump in the interest rate.

It is more expensive lending and if you know if you can save a few grand on your tax bill that is obviously an advantage but if every two years you're remortgaging and paying a £2,000, £3,000, £4,000 arrangement fee, a much higher interest rate, it starts to unravel potentially.

So I guess the main point here is if you do speak to a tax advisor and you get a feel for how much tax you think you might be able to save on a yearly basis if you buy through a limited company compared to just purchasing under your own name, once you've got an idea of how much you're going to be able to save you can then start to look at the comparisons between a normal mortgage and a limited company mortgage and start to get a feel for whether financially it's going to be right for you.

If it's significantly cheaper overall to go through the limited company then maybe that's the way to go, although bear in mind again that you might be looking at kind of slightly more obscure lenders maybe the process will be a bit slower, usually you need to get independent legal advice so the legal cost will be a bit more expensive as well, so these are all kind of factors to consider before you make a final decision. I guess a couple of bits of criteria, just two or three kind of key points. SPV, so special purpose vehicle. So the company that you set up has to be designed for property only, generally, not always. sometimes not, but it's a rule of thumb if you can keep to that you're going to keep those limited options at least open as wide as you can.

Just to give you a quick example there, if you're already running a limited company, let's say you know you're an accountant for for example, you're running a limited company and you think actually maybe I'll just purchase the new property through the limited company that I already own. Generally that wouldn't be appropriate with most lenders because that isn't an SPV, that's a business set up for accountancy rather than for purchasing and managing properties.

Definitely. Going hand in hand with that SPV you would get your S-I-C code, or SIC code if you will there are three of them that are generally acceptable and again if you're setting up for property only it's almost always one of those three. If you want those information they'll be in the bio down below, the three main SIC codes.

Good point but again some lenders are a bit more lenient, they might have a few more SIC codes that they can accept, but generally there's a very short list of acceptable SIC codes of what the limited companies are kind of registered in the way it trades.

The last bit would be about how they underwrite them. Yeah, this is a bit of a misconception really, even though the the limited company will own the new property, which is essentially how you're going to be saving tax, the mortgage application, although they will be looking at the details of the limited company, they will actually be assessing you, the directors of the limited company, when they assess the mortgage.

So they may have a minimum income, they'll run the credit check on you, so again regardless of the status of the company you personally would need to meet the the credit check. Often they would require all directors of the limited company to be named on the mortgage, again because they want to know the details of each director rather than just the company.

To try and summarize that a little bit I would say if you're buying one property and that's it, you know you're buying this long-term pension plan a lot of people don't normally end up buying through a limited company, well you can, but especially if you're not a higher tax payer.

But once you start thinking actually I do want to buy 3, 4, 5 and beyond it it can sometimes be more beneficial, so the more you buy, sometimes, becomes more beneficial.

But it is so important to talk to someone and understand, right if I don't do it through a limited company what do I get? If I do buy through a limited company what do I get, from a mortgage perspective.

Have your conversation with your accountant or whoever it is that's told you to do it anyway and then you can weigh those two up.

Like Kye says for some people, yes it is definitely the right option, as long as you know the figures that you're looking at and it can save you potentially a significant amount of money, but it's not for everyone, it's definitely not for everyone, so you need to factor in all of the details, before you make your final decision.

Any questions obviously get in contact, we do have a link in the bio to come over to our website or give us a call if you've purchased through a limited company or thinking about purchasing through a limited company. Obviously feel free to leave us some feedback in the comments we'll do our best to come back to you and hopefully hear from you soon, thanks a lot!