There are countless ways to make a living from property, including taking out a range of mortgages on a buy to let basis, and renting these homes to paying tenants. You can choose to make these investments as a private individual, or set up a company to handle the accounts and keep your property interests separate from your private finances.
If you are looking to obtain a buy-to-let mortgage, whether as a first time buyer or established property trader, there are some distinct pros and cons to doing so as a limited company. This guide will detail the difference between taking out a limited company mortgage and a standard mortgage agreement as an individual.
What is a limited company buy to let mortgage?
A limited company buy to let mortgage is simply a buy to let mortgage that is offered to SPV limited companies.
For some people, buying and letting properties is a way to supplement their primary income and keep a passive stream of money coming. For others, the purchase, management and maintenance of property is a way to make a living rather than a conventional 9 to 5 job. Those that fall into the latter category frequently set up limited companies to manage their property interests.
If you are seeking a buy-to-let mortgage as a limited company, you will be making the application – and, if successful, owning the property – as a business rather than an individual. This comes with some undeniable advantages, especially from a financial and legal standpoint, but there are also some potential drawbacks to limited company buy to let mortgages.
Why set up a limited company for my buy to let properties?
There are three main reasons why people consider taking out buy-to-let mortgages as a business rather than an individual.
Distincinction in your finances
Limited companies run their own sets of accounts, kept disparate from the owner of the business. This can come in helpful when applying for loans and mortgages for a number of reasons, which include:
- Lenders assessing a mortgage application will judge against the finances of the business, not the individual, so bad personal credit score is less of a concern.
- If the worst happens and you cannot keep up with mortgage repayments and default on the borrowing, it is your business that suffers the penalties to its credit score.
- Properties purchased by limited companies will not impact the ability of an individual to seek a mortgage on a residential property to use as a family home – the finances involved in the investment properties are not linked to your personal finances.
There are also tax reasons to consider that make limited companies a more appealing model for property trading, which we will elaborate upon shortly.
Taking out a company mortgage rather than a personal mortgage also offers legal distinction to landlords. Any complaints made by tenants, or legal cases that may be brought against personal landlords will be directed to the business that owns the property, not you as an individual.
Buy to let tax relief for limited companies
If you own property as an individual, the tax benefits are comparatively limited. You will need to declare your rental yield as taxable income, and only 20% of the interest you pay on your mortgage can be written off as an expense on your tax return.
If you own a large property, or multiple small homes, rental income will likely place you in a higher tax bracket. This means you’ll probably need to pay between 40-45% of your income in tax every year.
If you use a business to take out a buy-to-let mortgage, the property will be owned by the limited company. This means that you will only need to pay corporate tax on your income, which is just 25% as of April 2023. This is potentially a substantial saving, even when you consider the additional expense and administration involved with running a limited company.
How do mortgages work for a limited company?
Buy to let mortgages for limited companies work in the same way as any mortgage. Money is borrowed from a mortgage lender and is the repaid through regular monthly payments.
Most ltd company btl mortgages are arranged on an interest only basis, meaning only the interest is paid each month, with the full balance remaining outstanding.
The process of applying for a mortgage on a buy to let basis as a business is no different from that of an individual. except the financial reviews will be conducted against your professional interests rather than your personal money and income. In addition, the deed to the property will belong to your company, not you personally.
Be aware, however, that the named directors of a limited company will need to personally secure a mortgage taken out against a business. If you fail to keep up with your repayments, you will need to use personal savings accounts to service your debt – or face significant consequences.
Keep reading – interest only buy to let mortgage
Is a limited company BTL mortgage right for you?
A buy to let agreement taken out on this basis is ideal if the following circumstances apply to you.
- You are looking to take out more than one mortgage on a buy-to-let basis.
- You do not wish to merge your business and personal property interests.
- You are keen to – legally – reduce your tax obligations.
- You wish to access higher cost mortgages – the loans open to a company can be more substantial than those offered to private individuals.
How to set up a buy to let ltd company to obtain a mortgage
If you have identified a property you wish to buy, mortgages need to be researched.
If you decide that the most efficient way to seek these loans is as a business, you’ll need to set up a limited company. It is surprisingly simple to achieve this aim – just head to the Companies House website and fill in the necessary forms.
All you’ll need is half an hour to spare, and £12 to pay the registration fee. As we will discuss shortly, it is advisable to register your company as an SPV (Special Purchase Vehicle) while you are signing up.
What are the pros and cons of limited company buy to let mortgages?
The mortgage details when taking out a mortgage on a buy to let basis differ for a company – you will not get the same terms and interest rates on such loans as you would as a private individual.
Some of the differences are for the better, and some could be considered less favourable. Let’s summarise the pros and cons of taking out a buy-to-let mortgage as a company.
Benefits of these mortgages
We have previously discussed the financial and tax benefits of owning property as a limited company, but the point bears repeating. If you take this approach, you will pay less tax and enjoy legal separation between your personal standing and your business affairs. This helps many landlords sleep better at night – consider it a form of insurance against legal culpability if things go wrong.
Drawbacks of these mortgages
Not everything involved with applying for buy-to-let mortgages is sunshine and rainbows. Be aware of the following potential issues that you may encounter.
- Not all lenders will work with limited companies, so you may find that your choice of buy-to-let mortgage products is more restricted than it would be as an individual.
- Buy-to-let mortgages generally attract higher interest rates, and a limited company buy-to-let will cost even more. You may also need to pay a higher product fee and other associated expenses.
- If you are running a business listed on Companies House, you will need to publish annual accounts that can be accessed by the public, and HMRC will keep a closer eye on your tax returns. You’ll likely need a professional accountant to avoid being subjected to a tax audit.
- Any savings that your business holds can be seized if you struggle to keep up with your mortgage repayments and end up owing money to lenders.
- Business landlords are arguably subject to greater scrutiny than private landlords, and may be treated with suspicion by some tenants.
- As a company director, you need to secure the mortgage against your perosnal assets.
Always take the time to read the small print on any deals you are offered by lenders, ensuring that you understand all the details. These loans can be complicated, so it’s advisable to enlist the services of a legal professional – which, again, will cost more money.
Stamp duty on your company mortgage explained
If you take out a buy-to-let mortgage as a limited company, you will need to pay more money in stamp duty than you would as a private buyer. Stamp duty is a form of tax applied to the purchase of property, and it rises if you are buying as a business or own more than one home.
You will initially need to pay the traditional stamp duty on the property, the value of which will be somewhere between 5-12% of the purchase price, depending on the value of the property.
On top of this, a limited company will need to pay an additional 3%, regardless of whether this is the only buy to let investment on the books or part of a larger portfolio.
What is an SPV and how do they work?
SPV stands for Special Purpose Vehicle. An SPV is a company that is set up with one particular purpose in mind – in most cases, this is the purchase and letting of property.
There is no real legal distinction between an SPV or a standard limited company, but lenders are likelier to look up an SPV favourably as they are confident any loans or lines of other credit will be used exclusively for the purchase and upkeep of buy to let properties by professional landlords.
Will I qualify for this kind of mortgage?
If you wish to buy property on a limited company buy-to-let basis, you will need to check that you qualify for a lender’s specific criteria. Lenders will not let mortgages be taken out by just anybody, whether you are an individual or a business. As a general rule, lenders will look for the following:
- A minimum income threshold – this varies between lenders.
- At least one UK-based director aged 21 or older. If you are representing the company as a buyer, expat status is unlikely to see your application accepted.
- Proof that you are in good standing with HMRC and are meeting your tax commitments.
- Evidence that your company is in good standing – if your business has made news headlines for negative reasons, this will reflect poorly on your application.
- An ability to meet the lenders affordability criteria.
Above all, lenders will seek assurance that taking out this mortgage will not plunge your business into financial difficulty.
Any buy-to-let mortgage is considered a risky investment, and lenders will only work with a business that will make them money by repaying the mortgage, plus interest, in a timely manner.
FAQs about a mortgage for a limited company
If you are still on the fence about whether this is the best approach to buy-to-let mortgages, or you have more questions about a limited company buy-to-let arrangement, let’s quickly review some of the most commonly asked questions about these loans.
How much deposit will I need to get a mortgage?
As always when taking out a buy-to-let mortgage, the more you can lay down as a deposit, the better your interest rate is likely to be. You will likely need to pay a minimum deposit of around 20 to 25%, though if you can pay as much as 40% you may unlock better mortgage deals.
What is the maximum age for buying BTL property as a limited company?
There is no maximum age for the director of a company when looking to take out a buy-to-let mortgage as a business. While private landlords will not be accepted for a mortgage if older than 85, even for a very short-term agreement, anybody can apply as the director of a company as long as they are older than 21.
What is the minimum and maximum loan on mortgages for a limited company?
That depends on how much deposit you can lay down, and how much money your company generates. This could be pure rental income, or it could be from other business interests alongside property. As a rule, most lenders will start their offer for buy-to-let mortgages for companies at a loan-to-value ratio of 75%, though some may drop to 60% and others will go as high as 85%.
How much income does a business need to qualify for a limited company mortgage?
This varies – all lenders will have their own regulations surrounding this, so you may need to shop around for a mortgage provider that is willing to work with your company. In most cases, you will need to have posted profits above £25,000 for at least two years unless registered as an SPV, but some lenders will only consider corporate landlords with business income that is much higher – potentially as much as £80,000 PA.
Can I get more than one limited company BTL mortgage?
Yes you can. Legally, there is no limit on how many buy-to-let mortgages a single company can own.
Some lenders will set their own restrictions. Some lenders will not allow a single business to own more than two properties, while others are more flexible and may allow up to five.
You will definitely not be limited to just one, though – provided you can prove that your business generates enough income to keep up with the cost implications of all of these arrangements.
Will I get a company BTL mortgage as a first time buyer?
All landlords need to start somewhere, and you will naturally be a first time buyer at some point when taking out a mortgage on a limited company buy-to-let model. This does not need to be a hindrance, especially if you are registered as an SPV.
The same considerations will arise here as when you take out maiden buy-to-let mortgages as a private individual. You may need to take a hit on higher interest rates, as lenders will consider you a higher risk than landlords that already own and manage other properties.
Does my company need to be limited or can I be in a partnership?
Your business must be registered with Companies House to take out a mortgage on a limited company buy-to-let basis.
If you are in a partnership with one other individual, you will need to apply for a Partnership Mortgage which is a slightly different arrangement with its own set of restrictions and regulations.
What happens to my property if my company is dissolved?
If you plan to wind up your company that owns property, it is highly advisable to sell before you close the business. If you fail to do so, or the company is dissolved under an order of law, the building will be considered ‘ownerless.’
This means that, as per section 1012 of the Companies Act 2006, the property automatically belongs to the Crown and you have no legal claim to it – or any money tied up in the interest.