Buy to let through LTD company or partner (not yet wife)

Hi Matt,

You have listed the main advantages of purchasing in your partner's name.

However, what if your circumstances or plans change.

Will you buy more property?
Will your partner always be a lower rate tax payer and or will the rental income push her into being a higher rate payer?
What if you do not stay together?

The majority of new BTL purchases are now done in the name of a Ltd co.

Please also see our main Tax Planning page >> https://www.property118.com/tax

Be careful! I made the mistake of buying through a ltd company on the advice of the various "experts" around me. It should work BUT this is what my "experts" didn't either know or didn't tell me:

1) it must be an SPV - It can't be a company that is trading if you want to get a mortgage.
2) at the moment there are relatively few lenders who will lend to an SPV, so the rates tend to be higher.
3) just because it's a LTD company, that doesn't avoid a full investigation into your personal financial affairs - That's OK but don't underestimate how much documentation you need to produce for them.
4) LTV's tend to be less - typically around 60% or less.
5) many of the existing lenders have minimum limits for lending to Ltd companies, some being as high as £250,000.
6) Because there are so few lenders, you may find that your property doesn't fit their criteria. I had the following reasons for not lending (The property is in Margate).
a) Margate is dump (it's not)
b) It's over a row of shops
c) There's a petrol station over the other side of the road, 100 yds down the road
d) It's on the first floor (Yes, so what?)
e) It's in Margate (different lender from a.
f) There's no way for the residents to escape a fire (there's an integrated fire alarm, and the emergency exits are via escape windows
g) It has a flat roof - It's in a block of flats for heaven's sake , and it's not the top floor flat AND we told this particular lender on the application form. They only decided not to lend on this criterion AFTER they had stung us £400+ for a survey!

and on and on. Bear in mind that we had no problem getting a mortgage on the flat above this one - That's because we bought it in our own names.

Right now I wish I had simply purchased this flat in the same way as the one above it. Sometime in the near future most of the issues I came up against will go away, but I would check very carefully that you can get a mortgage on THIS SPECIFIC property before you proceed.

Best of luck with it

Reply to the comment left by "Glyn Radcliffe-Brine" at "22/11/2016 - 11:21":

Hi Glyn

Sorry but I disagree with a few of your points.

There are several lenders lending to SPV's and many now do so on the same terms as they lend to individuals. A few years ago I would have agreed with you on all of the points you have made but times have moved on.

It sounds like you made an application to a particularly awkward lender, although I suspect many would shy away of lending on the property you have described, regardless of whether the application is in your own name or that of a company.

Your case is particularly complex due to the combination of thee type of property and that the borrower is trading company. There will be very few lenders willing to consider this. If your company was an SPV you may have fared better as there would have been more lenders to choose from.
.

It's also worth considering the capital gains implications. You currently get an annual allowance of £22,200 between you and your wife. If you decide you need to sell the property and haven't made any other capital gains that tax year - so you can retain all your profit. This isn't true with a company - you will be liable either for 10% or 28% on all profits.

Reply to the comment left by "Richard U" at "22/11/2016 - 15:41":

Companies pay 20% tax on profits regardless of whether they are from trading or capital gains.

If you don't use your personal CGT allowance by selling a property you lose it, however, each shareholder in a company can take £5,000 of dividends tax free every year subject to making enough profits.
.

Reply to the comment left by "Glyn Radcliffe-Brine" at "22/11/2016 - 11:21":

Mark, I stand by what I said - I moved the property to an SPV as soon as I realised I had not been given the correct information. All of the other points I made related to the SPV. There may be several lenders, but the pool of lenders for SPV's is still far smaller than for standard BTL mortgages. As for the small number of lenders in relation to the specific property, we had no difficulty at all in getting a 75% mortgage on the flat immediately above the property in question. The properties are identical. So, no, the property itself wouldn't be an issue if it was held in our names.

I should like to emphasise that prior to the purchase I took advice from an IFA who has an excellent record over 18 years, an award winning conveyancing solicitor and an accountant I have worked with for many years and whose knowledge of the property market is prodigious. If they weren't aware of the issues until after the event, I would say that the Ltd company market is still more like the wild west than a mature region

Reply to the comment left by "Glyn Radcliffe-Brine" at "22/11/2016 - 11:21":

Mark, I stand by what I said - I moved the property to an SPV as soon as I realised I had not been given the correct information. All of the other points I made related to the SPV. There may be several lenders, but the pool of lenders for SPV's is still far smaller than for standard BTL mortgages. As for the small number of lenders in relation to the specific property, we had no difficulty at all in getting a 75% mortgage on the flat immediately above the property in question. The properties are identical. So, no, the property itself wouldn't be an issue if it was held in our names.

I should like to emphasise that prior to the purchase I took advice from an IFA who has an excellent record over 18 years, an award winning conveyancing solicitor and an accountant I have worked with for many years and whose knowledge of the property market is prodigious. If they weren't aware of the issues until after the event, I would say that the Ltd company market is still more like the wild west than a mature region

As with most decisions it's like to come down to the numbers. I guess the question has to be: How much does it cost in terms of fees, less attractive financing & lost CGT allowances vs the benefits of Corporation tax rates, and the ability to avoid section 24? For me I think avoidance of Section 24 is worth approx: £1000 a year on one of my properties. If the difference is marginal and there are lending restrictions I know which route I'd take. Mark perhaps you have a model you can share which shows the relative merits of each approach and their impact on returns? Keen to understand if I am missing something.

Glyn/Mark,
A question about the comment - " it must be an SPV – It can’t be a company that is trading if you want to get a mortgage" - if a company is being set up from scratch does it need to be a SPV? I didn't think it had to be if starting from scratch (I'm looking at setting up a Ltd Co to do buy/renovate/sell so that may also be slightly different).

Reply to the comment left by "Paul Temple" at "24/11/2016 - 15:28":

Paul, here is the reasoning I was given by a lender regarding Ltd companies (it was subsequently confirmed by other lenders) :

If the company has traded, it is possible that somewhere in the past there is a liability lurking that could result in a charge being made against the property. In theory this charge could trump the lender's charge - e.g.bankruptcy, dispute amongst shareholders, etc

In my case, as the company provided professional services (software consultancy) to large organisations such as the NHS, insurance companies,railway companies and the like, a few years down the line the company could be hit by a multi-million pound claim where software failed and caused a death, serious injury or the closure of a plant, station or hospital. None of the risks were likely and they were insured, but the hassle is something that none of the lenders our broker approached wanted to take.

Do also note that one lender said they would lend to a trading company and wasted 6 months messing around before saying that, no, they wouldn't lend to a trading company.

There are quite a few other complications to take into account. For example, if you have more than one property, do you lump them all into one SPV or do you create a new SPV for each property? There is no right answer to this question as it all depends... Some lenders don't want to lend on multiple properties in one SPV and others do. Many (probably all) lenders won't lend on a property that is in an SPV where there is a mortgage with another lender. There are all sorts of issues, and I would strongly recommend finding a solicitor who, in addition to being a property specialist, has also successfully handled at least 3 successful multi property deals. And demand to talk to the clients before proceeding!