Limited Company Buy to Let for UK Expats

---

UK Expats have viewed Buy to Let (BTL) investment in the UK as an ideal way to owning property and building their wealth.  While it has been a very popular choice for UK expats, it has also been popular with the British public when they have found themselves with a bit of spare cash. Over the years, investment in BTL property in the UK has become so popular that currently, around one in five private homes are now owned by landlords.

This high level of landlord owned property for the rental market is reducing the homes that are available for young first-time buyers to purchase and they often find themselves priced out of the market. As a way of addressing these problems, British chancellors have begun introducing measures to bring the taxation of BTL property a little more into line with normal commercial ventures. The result of this is that landlords who hold multiple properties in their portfolio are looking for solutions to mitigate as much of the increased tax burden as they possibly can and this has inevitably led them to ask;

Should I use a limited company to hold property in the UK?

As with so many tax situations, there is not a straightforward answer to this question. Each individual case will be different and much will depend on the individual’s future intentions. Some of the things to be considered are shown below.

UK expatriate landlord considerations

• The landlord’s personal circumstances – number of properties owned, a property that’s owned jointly, future intention to involve family members.
• Future investment intentions – will only one or two properties be held or will the intention be to build a large portfolio.
• Availability of mortgage finance – this is an important consideration if properties are to be financed via a mortgage.
• Legal requirements – a limited company is required to file its accounts together with the financial status of its entire property portfolio, with Companies House on an annual basis.

Where UK expats consider investing into buy to let property through a limited company, it is important that they understand the advantages and disadvantages of doing this and accept the responsibilities that are associated with company ownership before they make any definitive decision. It would be a sensible move to obtain professional advice from both a financial and legal point of view before proceeding.

Advantages of using a limited company

• Tax on mortgage interest payments – from 2017 to 2020 the amount of buy to let mortgage interest tax relief individual landlords can claim back will be progressively cut from a maximum of 45% to 20% for higher rate taxpayers. As Limited Companies set their total costs against total income and pay corporation tax on profit, the tax payable via a limited company will generally be lower than tax on individual income.
• Tax on dividends – from April 2016 a new tax-free dividend allowance was introduced meaning that the company directors could potentially receive tax free dividend income from any profits made on the properties held.
• Faster portfolio building – a buy to let portfolio could grow more quickly within a limited company as there will be no income tax on the retained profit. This should provide more cash to re-invest even although corporation tax is payable on trading profits.
• Withdrawal of personal funds – where directors invest cash into the company as a director loan for a mortgage deposit or other things, this money can be taken back out of the company at a later date.
• Joint ownership – limited companies can be ideal for individuals wishing to own property as a collective rather than as two or more individuals owning it jointly as it can be much simpler in the future if one of the individuals no longer wishes to be party to the ownership.

Disadvantages of using a limited company

• Capital gains tax – when the company sells a property its value is simply added as income to the company bank account and any declared profit will be subject to corporation tax. When an individual landlord sells property he or she has a personal annual tax free capital gains tax allowance that will reduce or remove any tax liability.
• Cost of running a limited company – such costs include but are not limited to the following:
  • preparation of accounts
  • filing annual returns at Companies House
  • legal fees
  • accountancy fees
  • Having a registered office
• Higher lending costs – lending to a limited company will inevitably mean that lending rates will be higher than what an individual landlord would obtain for a buy to let mortgage.
• Reduced choice of lenders – many lenders do not offer mortgages to limited companies and when they do, the range of products they offer is generally more limited.

SPV limited company

This stands for special purpose vehicle (SPV) and it is essentially a company which has been set up for the sole purpose of managing a property and it will not become engaged in any other activities.  Lenders who offer mortgages limited companies usually prefer to lend to SPVs as opposed to normal trading limited companies because they are simpler to understand and therefore easier for underwriting.

As a result of this many landlords are now considering purchasing their rental property via an SPV limited company because it could provide them with a more tax efficient business, particularly if the proposed changes to tax for individual landlords are fully implemented.

For those who already have a limited company and are wondering whether it could meet the SPV criteria, here is what the lenders would look for:

SPV check criteria

• SIC code for letting property – this is the standard industrial classification of economic activities (SIC) and is used to classify business establishments by the type of economic activity in which they are engaged.
• Trading range – If the company has traded in another field in the past, some lenders will still lend to the company as long as this is historic and the company now has the right SIC.
• Getting a SIC code – You will need a SIC code when filing the SPVs Annual Return with companies house and this can be obtained from the official condensed SIC list on the gov.uk website. Most investors require a SIC code from Section L: real estate activities.

Transfer of property from Individual name to limited company

It is important to consider the tax considerations when transferring existing properties from an individual name into a Limited Company structure as this could be more complex than simply purchasing new properties into the company. For example, capital gains tax and stamp duty land tax (SDLT) may be payable by the individual on transfer and this may outweigh the benefit.

Procedure for obtaining an expat limited company Buy to Let mortgage

1. First considerations for obtaining an expat LTD BTL mortgage

The first consideration is the type of Limited company that will hold the property. The choices are between an SPV and a trading limited company.

• Newly set up SPV – In this situation and because the SPV will have no trading history, lenders will underwrite the SPV as though you were applying for a buy to let mortgage in your own name and will base their decision on your personal circumstances in the same way as they would if you were applying for a BTL mortgage yourself. If you are setting up a new SPV then please click on the link to the expat BTL mortgage procedure.
• Establishes SPVs – Established SPVs will need to show two years of strong accounts. As the SPV does not “trade,” some lenders will accept accounts which have been kept by the applicant rather than insisting on formal ones from an accountant. If the income from the SPV is less than £25k pa, the lender would also look to assess the director’s personal income and circumstances.
• Trading limited companies – There are a limited number of lenders who will offer buy to let mortgages to trading limited companies because they require a much greater level of understanding to underwrite. These products are mostly accessed by a select few intermediaries who have the experience to make sure the application meets the lender’s specific requirements.

Generally, lenders will need to see two years of strong accounts which show income of between £25k and £50k although there are some lenders that will lend as long as taxable income can be proven. However if the company has been making a loss or has had a slow year, the directors may struggle to obtain a mortgage because lenders will think that withdrawing company funds to use as a deposit will be detrimental to the business. Lenders will want to see income in some form or another as reassurance that should the property go a couple of months without a tenant, it would not place the business in financial difficulty. Lenders prefer dealing with landlords who have reasonable sized portfolios because void period risk is somewhat mitigated.

Limited company buy to let (BTL) mortgages in the UK are currently unregulated which means that should things not turn out as you would expect, you may not be able to have your grievance considered by the ombudsman service in the same way as you would with a regulated mortgage. With this in mind, some mortgage advisers will handle limited company BTL mortgages in the same way they would when dealing with a regulated mortgage and although this does not change your risk, it does mean that your limited company BTL mortgage should be properly handled.

In addition to the regulation situation, limited company BTL mortgages are complicated to organise and this makes it essential turn to an experienced limited company BTL mortgage broker to handle things rather than attempt to deal directly with a specific lender. A limited company BTL mortgage broker with proven experience will understand the market and will have contact with all lenders offering this type of service.

It should be noted that limited company BTL mortgage brokers with the right experience to obtain limited company BTL mortgages are thin on the ground and although there are many regulated mortgage brokers operating within the UK, you will find in practice that very few actually handle limited company BTL mortgages on a regular basis.

The procedure steps shown assume that you will be using an experienced limited company BTL mortgage broker to handle the process on your behalf.

2. First contact with your limited company BTL mortgage broker

Whether you are communicating with your mortgage broker by telephone or email or meeting face to face your limited company mortgage broker should provide you with certain information about themselves and how they operate:

• Identity – Who they are and how to contact them
• Regulation – Explain how they are regulated to carry out mortgage business. All mortgage advisers in the UK are required to hold permissions to do so from the financial conduct authority (FCA) which they obtain through being either directly authorised by the FCA or by being an appointed representative of a network who is authorised by the FCA.
• Terms of business – Provide you with their terms of business. This will include information on how they will charge you for their time and explain your rights in the event something goes wrong.

Having got that out of the way your limited company BTL mortgage broker will gather comprehensive financial information on your company and possibly that of its directors. This process is called fact finding and it is absolutely essential that it is carried out thoroughly as the information gathered will form the basis for deciding on the mortgage product most suited to your company.

3. Obtaining an agreement in principle for your limited company BTL mortgage

With the fact find information to hand your limited company BTL mortgage broker will research the market and identify a lender and product that he or she believes would be most suitable. Many people think this is simply a question of finding a limited company BTL mortgage provider offering the lowest rates of interest or low arrangement fees but in fact many other factors can come into play. Some such situations could be:

• Time constraints – if a lender is known to be slow to consider a case or is known to complicate the process and you need a decision quickly then you may be prepared to accept a slightly higher interest rate if it lets you complete the mortgage within your fixed timeframe.
• Lender criteria – lenders all have different criteria under which they will lend and it may be that the lender with the best rates may place you just outside their accepted criteria. You would then have to make the best deal possible with a lender who is prepared to accept you.
• Accounts – the best rates and terms are usually only available to companies that can provide strong accounts year on year. Where this is not the case lenders may take account of directors personal finances in the terms they offer and may even refuse to accept your application.

Having found one or two suitable products your limited company BTL mortgage adviser will discuss them with you and when you agree on the most suitable one for your circumstances, your limited company BTL mortgage broker will obtain a decision in principle from the lender. This is not a binding agreement but is only an indication that if the supporting mortgage information you provide with the formal application confirms what has been indicated for the decision in principle then there is a strong possibility that the lender will accept an application from you.

4. Submit the full limited company BTL mortgage application

With a decision in principle acceptance you will be clear to make your formal application for your limited company BTL mortgage. Your limited company BTL mortgage broker will do this in conjunction with you as the application form needs to be accurate and will require a number of supporting documents, such as:

• Certified accounts – The lender will likely want to see at least two years of certified accounts.
• Proof of tax paid – Documents from HMSC showing tax paid in the last two years.
• Company bank statements – Lender will use these to confirm the information on the company accounts.
• Rental Value – The rental value of the property as confirmed on the survey report will be used by the lender to assess the amount of loan that will be made available.

Where the lender is to take account of an individual directors finances, the following will be required from each director.

• Proof of identity – documents such as passports and driving licences are normal.
• Permanent address – Normally utility bills and bank statement type documents will be accepted.
• Salaries and dividends – Proof of income from the business and other sources will be required. Payslips and business accounts are usually used for this.
• Affordability – Bank statements let the lender see your income going through but they also allow the lender to see how you spend that income. Today lenders look at a borrowers lifestyle to ensure that they can afford any commitment made.

5. Lender reviews your limited company BTL mortgage application

On receipt of the formal limited company BTL mortgage application the lender will review the information provided. In all likelihood the lender will ask for further information or documents to be provided and this process may be repeated several times until the lenders application processing team becomes satisfied that the case is sufficiently compliant to go to underwriting.

As part of this process the lender will instruct a valuation on the property. You will be expected to pay for this but will have no rights to see the valuation report. The lender will use that valuation report to decide how much they would be prepared to lend against that property.

At this point and if the valuation given in the report meets the lenders requirement the limited company BTL mortgage application review team will take a final review of the case and decide whether to send the case for underwriting or reject the application.

6. Lender conducts final review of your limited company BTL mortgage application

The underwriter is the lenders final decision maker and will review the whole case and check it carefully against the lenders lending criteria. If the underwriter is satisfied an offer for a limited company BTL mortgage will be issued. Copies are usually sent to your solicitor and to your BTL mortgage adviser who will check the offer and alert you to anything that is not as agreed.

Note that by this time your limited company BTL mortgage broker should have issued you with a letter outlining his or her reasons for advising you to accept that particular offer.

7. Lender issues your limited company BTL mortgage offer

If the lender issues a limited company BTL mortgage offer it will be sent to your solicitor with a copy to your limited company BTL mortgage broker who will check the offer and alert you to anything that is not as agreed.  This is a formal document and it will show the amount of loan that is available and the monthly repayments. It will also provide the term of the mortgage and the terms and conditions under which the offer is made.

8. Solicitor receives your limited company BTL mortgage offer

Once the solicitor has received the offer they should complete any checks and searches on the property, exchange contracts and move to finalise the purchase. Your solicitor will be the person that will draw down on the loan and arrange to pay the sellers solicitors for the property and pay any taxes such as stamp duty that may be required.

This whole process from first contact with your BTL mortgage broker to your solicitor concluding the purchase can take a long time and anything between 6 weeks to 6 months would be considered as fairly normal.

Scottish Law

If the property you intend to purchase is in Scotland then you will find the legal system to be slightly different. It is normal in Scotland for offers to purchase a property to be made through a solicitor which usually means engaging a solicitor right from the beginning.

 

---