The buy-to-let sector has experienced some major changes in recent years, most of which have had a negative effect on buy-to-let landlords.
The changes have created an environment that makes the approach to buy-to-let more sustainable for the purchase via a limited company. In fact, 55% of landlords are looking to use a limited company to buy rental property over the coming year, this being significantly higher than those purchasing property personally.
Why use a limited company for buy-to-let?
To be specific, a special purpose vehicle (SPV) is a limited company, created for the sole purpose of purchasing and holding property and nothing else. For lending purposes, this is the preferred method as it is easier to underwrite when compared to trading limited companies.
Whilst you may assume that this is done to avoid additional costs, an SPV will be subject to the corporation, income, and dividend taxes through profits and the withdrawal of funds. In addition, administratively, SPVs require annual accounts to be provided, and lending is becoming increasingly difficult to obtain through greater competition.
You may, of course, be wondering why you would use an SPV for a purchase of this type. There are some clear benefits, however.
When profits are accrued over an extended period, which is what happens with a buy-to-let investment, large amounts of capital can be used for investments in the future, more than would be possible with investment via an individual.
It is easier to get other parties involved, including family members, through the allocation of shareholders and directors. The benefit here is the opportunity for inheritance tax and capital gains tax.
The company director can also allocate funds for a personal pension. With the income of the SPV naturally reduced, tax is also decreased.
Setting up an SPV
Ensure that, when setting up a limited company, the structure is set up for the sole purpose of holding property. The company will be set up under the Buying and selling of own real estate (68100) or Other letting and operating of own or leased real estate (68209), clearly limiting the use of the company.
Most lenders will want to see two years of accounts, as well as expenditures, personal income and any other information that would support the application. Background checks will also be carried out to ensure that voids, refurbishments and other perceived risks can be covered.
As an investor, you will want to be aware of the security requirements needed for investment. Personal guarantees and/or a debenture will have to be investigated before opting for an investment of this kind.
It is important that you understand your own responsibilities for operating an SPV and being the director of this limited company. Alongside HMRC tax returns, the annual account will need to be submitted to Companies House.
You may also be responsible to notify banks and loan providers on an annual basis of company accounts and performance. Make sure you are prepared for this and do not do it at the last minute!