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Buy-to-Let Limited Company: A Comprehensive Guide

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If you’re a business owner looking to invest in property, you may be wondering whether to buy the property in your own name or through a limited company. Both options have their advantages and disadvantages, and it’s important to consider them before making a decision. In this article, we’ll explore the pros and cons of each option, as well as some important considerations to keep in mind.

One option is to set up a buy-to-let limited company. This allows you to purchase a property and take on a property loan through a company, rather than in your own name. This means that the company can be the legal owner of the property, which can be useful if you want to keep your personal and business portfolios separate. We’ll cover how to set up a buy-to-let limited company, how to get a loan for a buy-to-let property, and how to choose the right commercial mortgage lender. We’ll also answer some frequently asked questions about the process.

What is a Limited Company?

When starting a business, you have the option of registering as a sole trader or a limited company. A limited company is a separate legal entity from its owners, known as shareholders, and must be registered at Companies House if operating in the UK. Once incorporated, the company becomes a legal entity, which means that its owners cannot be held personally liable for any outstanding debt. This is in contrast to a sole trader, who is personally liable for any debt incurred by the business.

A limited company also has the advantage of being able to take advantage of tax benefits and obtaining a buy-to-let mortgage, making it a popular choice for property investors. Additionally, annual accounts must be submitted to Companies House, and dividends can be paid to shareholders.

In summary, setting up a limited company can provide protection for its owners against personal liability and offer tax benefits, making it a popular choice for entrepreneurs.

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What is a Buy-to-Let Property?

A buy-to-let property is a type of investment where you purchase a property with the intention of renting it out to tenants. The rental income is used to cover the mortgage payments and other expenses such as insurance, maintenance, and management fees. The aim is to generate a profit from the rental income and any increase in the property’s value over time.

However, due to increasing costs, the net return from investing in buy-to-let properties has decreased in recent years. It is doubtful whether capital appreciation will exceed the rate of inflation. Additionally, when you sell the property, you will be subject to capital gains tax, which can significantly reduce your profit.

One way to mitigate this tax liability is to purchase the property through a limited company. Limited companies don’t need to pay capital gains tax, but instead, pay corporation tax at 19%. This lower tax bill for limited companies on selling a property might make it worthwhile, depending on your particular situation.

It is important to note that becoming a portfolio landlord with multiple buy-to-let properties can be a complex process that requires careful planning and management. It is essential to consider the costs involved, the potential rental profits, and the risks associated with being a landlord.

If you are considering investing in buy-to-let property, it is advisable to seek professional advice from a commercial mortgage broker or an accountant who specializes in property investment.

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How to Set Up a Buy-to-Let Limited Company

If you are planning to build a property portfolio, setting up a limited company is a good way to protect your personal assets. The first step to setting up a buy-to-let limited company is to register with Companies House. You will need to choose a name and an address for your company, and list the directors and shareholders. You can be the only director of your company.

Once your company is registered, you will need to open a business bank account, and then register to pay corporation tax. You will also need to keep accurate records of your company’s finances, including annual returns and confirmation statements. If you are not confident in managing your company’s finances, you may want to consider hiring an accountant.

It’s important to note that getting a buy-to-let mortgage can be challenging. You may want to consider using a special purpose vehicle (SPV) to help secure financing for your property investments.

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How to Secure a Commercial Mortgage for a Buy-to-Let Property?

To purchase a buy-to-let property, you will need to secure a commercial mortgage. High street lenders typically require a 25-35% deposit for a commercial investment property. Private landlords with a deposit of 40% or more will have access to the best deals if the rest of the application is comprehensive. Commercial mortgage rates are usually higher than residential mortgage rates, and lenders often charge a premium due to the higher risk involved. It can be more difficult to shop around for commercial mortgages as there are more residential lenders than commercial lenders. Ensure you meet the eligibility criteria and can afford the interest payments, product fees, and any early repayment charges.

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How to Choose the Right Commercial Mortgage Lender

When it comes to choosing the right commercial mortgage lender, there are different types of lenders you can consider. Each type of lender has its own advantages and disadvantages. Here are some of the most common types of commercial mortgage lenders:

High-Street Banks

High-street banks are the most obvious choice for securing a buy-to-let mortgage. The major banks offer tough-to-beat rates if you meet their eligibility criteria. They usually lend against the OMV and offer high LTV, which means you may get a larger mortgage. The major banks also have shorter and less onerous tie-in periods.

Challenger Banks

Challenger banks generally have a greater appetite to do business and can help some of the businesses that their high-street counterparts can’t. Their requirements are usually lower, which means their threshold for commercial mortgages can be easier to satisfy. They will also consider applications with credit issues in the last two years, which the major banks won’t usually do.

Banks can offer interest-only repayment options up to the maximum LTV, which makes sense for businesses that buy their premises for cashflow reasons rather than capital gains. 

Niche Lenders and Specialists

Compared to both types of bank, the smaller specialist lenders are a lot more flexible overall. If you want a commercial mortgage but haven’t been in business long, the niche lenders may be your best bet, as they are often prepared to lend to shorter trading histories and have lower affordability criteria. In some cases, it’s even possible to use projections instead of trading history if they’ve been signed off by an accountant.

The specialist lenders may also be more flexible in terms of location, considering applications for mortgages in most areas of the UK. These situations will be looked at on a case-by-case basis, however. The downside of these types of lenders is the cost, as they’re usually more expensive commercial mortgages than those you’ll get from the banks. The smaller lenders tend to lend against the FSV too, which is usually lower than OMV and therefore can significantly reduce the percentage of the property value you can borrow. They’ll also have longer terms and more restrictive exit fees.

It’s important to note that you should always make sure that the lender you deal with is authorised and regulated by the Financial Conduct Authority. 

If you’re not sure which type of lender to go for, you can use a mortgage broker or intermediary. We can help you navigate the complex world of commercial mortgages and find the right lender for your specific needs.

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Frequently Asked Questions

What are the allowable expenses for a buy-to-let limited company?

As a buy-to-let limited company, you can claim tax relief on allowable expenses such as mortgage interest, repairs, maintenance, and insurance. 

Can a limited company obtain a buy-to-let mortgage?

Yes, a limited company can obtain a buy-to-let mortgage. However, the criteria and interest rates may differ from those of a personal buy-to-let mortgage.

Is it more beneficial to purchase buy-to-let properties through a limited company?

There is no definitive answer to this question, as the most beneficial option depends on your individual circumstances. However, purchasing buy-to-let properties through a limited company can provide tax advantages and separation of personal and business assets.

What are the benefits of using a limited company for buy-to-let purposes?

The benefits of using a limited company for buy-to-let purposes include tax advantages, separation of personal and business assets, and potential for business growth. Additionally, using a limited company can provide a professional image and may be more appealing to potential tenants.

Which banks offer buy-to-let limited company bank accounts?

Several banks offer buy-to-let limited company bank accounts, It is advisable to use a commercial broker to compare the features and fees of each bank before making a decision.

What is the stamp duty for a buy-to-let limited company purchase?

The stamp duty for a buy-to-let limited company purchase is the same as for a personal purchase. However, since April 2016, an additional 3% stamp duty surcharge is payable on purchases of second homes and buy-to-let properties.

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