A limited company buy-to-let mortgage works in a similar way to a standard buy-to-let mortgage, but there’s a key difference. Instead of getting the mortgage and purchasing the property as an individual, you do it through a limited company. Why might you consider borrowing and buying as a limited company, and what are the advantages? We’ve got the answers in this guide.
What is a limited company buy-to-let mortgage?
A limited company buy-to-let mortgage is a type of mortgage where a property is purchased through a limited company or SPV (Special Purpose Vehicle) with the intent of renting it out. Limited company buy-to-lets may be popular with property investors due to the potential tax benefits, particularly for higher or additional-rate taxpayers.
In the context of individual buy-to-let mortgages, the income generated from the rent is added to your overall personal income, which might push some investors into a higher tax bracket.
However, limited companies pay corporation tax instead, which is set at a rate set of 25%, and this is the maximum a limited company buy-to-let investor will be charged under current government rates.
SPV limited company
Applying for a buy-to-let as a Special
Purpose Vehicle (SPV) limited company takes less than 2 mins
Why are limited company buy-to-let mortgages popular?
Since April 2017, there has been a significant increase in the number of landlords choosing limited company buy-to-let mortgages over individual ones. This shift was largely driven by
changes outlined in the 2017 Budget, including a reduction in the amount of tax relief available for interest on buy-to-let mortgages.
Prior to 2017, landlords paid tax on the net rental income after allowable expenses, such as all of the mortgage interest on the loan. From 6 April 2020, however, tax relief for interest on mortgages has been restricted to the basic rate of income tax, which is currently 20%.
Limited company buy-to-let mortgages can also be a viable option for people who want to purchase property as a collective. For instance, Molo allows up to four shareholders in a limited company to get a buy-to-let mortgage.
What are the eligibility requirements for limited company buy-to-let mortgages?
It’s important to note that the eligibility criteria for these mortgages can vary from lender to lender. Some common factors that most lenders typically consider include:
- The existence of an SPV limited company
- The existence of a trading limited company (not an SPV)
- The establishment of a new limited company at the time of purchase
- Limited companies with personal guarantees
- Limited companies without personal guarantees
The rental income usually needs to be at least 125% of the mortgage payment, and a deposit of at least 15% is required, meaning the lender covers the remaining 85%.
Why consider a limited company for buy-to-let?
Potential for lower taxes
One of the primary reasons landlords opt for a limited company structure is the potential for improved tax relief. This could be especially true for anyone who finds themselves in a higher tax bracket. Remember, you’re taxed as a company with a limited company buy-to-let, rather than an individual, which can be lower at 25% than a higher-rate taxpayer paying in excess of 40%.
Furthermore, limited companies can deduct 100% of the mortgage interest paid from their revenue before calculating taxable profit, a benefit not on offer to individual landlords due to changes in tax relief.
Limited companies may also provide more overall flexibility for tax planning. As a company director, you can distribute profits through dividends, which could reduce the amount of tax you pay. This flexibility can be particularly beneficial for higher-rate taxpayers or those planning to own multiple properties. However, it’s important to consult with a tax professional regarding how much you could potentially save.
Simplified inheritance tax
Planning for the future transfer of your business to family members can be significantly streamlined if you operate as a limited company. Transferring ownership of a company, which involves the exchange of shares, is typically simpler than transferring a privately owned property. As the property continues to be owned by the company during this process, it could potentially be safeguarded from certain tax liabilities, including stamp duty, inheritance tax, and capital gains tax. Again, it’s always important to talk to a financial professional regarding inheritance and any tax due.
Operating your buy-to-let portfolio through a limited company can also enhance the overall professionalism of your setup if the aim is to create a property business. From a tenant’s perspective, dealing with a company can often feel more professional and structured than with an individual if it’s presented as such. It can provide reassurance that all matters relating to the property will be handled in a professional manner.
It’s worth noting that the above benefits won’t apply to every landlord. That’s why it’s vital that you consult a financial professional before deciding whether to purchase your next buy-to-let property as a limited company.
What is the process of setting up a limited company for buy-to-let?
Setting up a limited company for buy-to-let purposes involves a number of steps. Each one is designed to ensure the smooth operation of your new property business. Here’s a detailed breakdown of the process:
The first step involves registering your company with Companies House. This process includes:
- Choosing a company name. This should be unique and not already in use by another company.
- Preparing legal documents. Part of this process includes a ‘memorandum of association’ (which includes the company’s name, location and purpose) and ‘articles of association’ (which outlines the rules company officers must follow).
- Paying a registration fee. As of 2023, the standard fee is £12 and can be paid online.
- Receive Standard Industrial Classification (SIC) code. Once set up, you’ll receive a SIC code. This identifies your company as being suitable for buying and holding property and renting it out.
Open a business bank account
Once your company is officially registered, the next step is to open a business bank account. The account is used to manage all income and expenses related to your property. It’s important to shop around and choose a bank that offers services tailored to your buy-to-let business needs. Remember, this account should be used strictly for business transactions to keep your personal and business finances separate.
Apply for a limited company buy-to-let mortgage at Molo
If you want to purchase your limited company property with a mortgage, you’ll need to find a lender and apply. To do this, you can use a broker to help you find the best companies. Or you can apply with Molo directly.
Not all lenders offer limited company buy-to-let mortgages as they’re considered specialist products. Here at Molo, we specialise in a range of mortgage products designed to help landlords invest in buy-to-let, including limited company mortgages.
And should you need any help forming a limited company business to purchase a buy-to-let property, Molo works with GetGround, which specialises in setting up managing companies for the purpose of buy-to-let.
SPV limited company
Try our limited company buy-to-let mortgage calculator and see how much you can borrow.
Final thoughts: business as usual
A limited company buy-to-let mortgage could be the right option for you, offering the chance to secure a rental property as a business rather than an individual. However, it’s always important to work out the numbers and see if buying as a business offers tax benefits as well as other advantages. Limited company buy-to-let mortgages aren’t for everyone, but those who do benefit stand to save when forming a company to buy a rental property.