Getting a mortgage through an SPV limited company
There’s a rising trend among landlords choosing to buy homes through limited companies, largely because of the tax relief on buy-to-let investments that’s no longer available on personal mortgages since the introduction of Section 24 Act.
Many investors are now getting in touch to ask about Special Purchase Vehicles (SPVs) as a way to secure favourable tax rates. But what is an SPV, and how easy is it to get a mortgage using one?
What is a Special Purpose Vehicle?
An SPV is a special type of company that can be used to purchase buy-to-let properties, rather than the property being purchased in the individual’s name. Its sole purpose is to hold the assets, and there is no other form of trading that is conducted through the company apart from the rent going in and the expenses coming out. There is no difference between an SPV and any other limited company, but an SPV is a company with one specific purpose – to hold property.
It’s fairly straightforward to set up an SPV, and it can be done online with Companies House for £12. It’s the same process as registering any other limited company, but you’ll need to choose the right SIC code (Standard Industrial Classification of Economic Activities), which sets out your business’s specific activities.
Most buy-to-let landlords will fall into category 68209, ‘other letting and operating of own or leased real estate’. It’s important to establish the SIC code early on because it tells the lender that there is no other form of trading being conducted within the company.
If your company is seen to be trading in something other than property, it will be harder to get a buy-to-let mortgage, which is why you should set up a new SPV company just to hold your buy-to-let/s.
Why choose an SPV?
If you choose to purchase a property through an SPV, it could make a huge difference to the amount of tax you pay. Instead of paying income tax, the company pays corporation tax, which is currently 19% but is being reduced to 17% for the 2020/21 fiscal year. Lenders are also more relaxed about the buy-to-let stress test, which now requires that the rent will cover 145% of the mortgage. For mortgages on properties in SPVs, the stress test is more like 125%.
As an SPV tax liability is considered separate from your personal tax liability, most lenders will offer a more generous rental calculation, so you might be able to more per monthly rent. Aside from this, having your buy-to-let properties in an SPV keeps them separate from any personal property you might have, such as a family home.
Can I transfer existing property into an SPV?
Generally speaking, no. This property would have to be purchased at fair market prices, rather than its original purchase price. You’d also incur the higher rate of stamp duty and it may be subject to capital gains tax. It’s really only suitable for landlords wishing to expand their portfolio with newly purchased properties. There are situations where this may be possible, but speak to a professional tax adviser first.
How easy is it to get an SPV buy-to-let mortgage?
Anyone with an SPV can borrow through it immediately. It’s not like taking out a business loan through any other type of limited company, because the burden of responsibility lies personally with the director, as the new company will have no credit history. Essentially, the property is in a company in name only, but the responsibility is with you. This allows you to borrow through the SPV as soon as it is registered.
As more investors are choosing to purchase properties using an SPV, there are more lenders willing to provide mortgages to limited companies, and the market is growing steadily and rates are becoming more competitive. If you’ve had trouble in the past being accepted for an SPV mortgage, remember that the market is changing rapidly and even if you have faced rejection from one lender in the past; it’s worth getting advice as the SPV lending market is improving and expanding.
The process is pretty much the same as buying a property as an individual.
Each lender will have their own criteria to determine the applicant’s suitability, but they may ask questions about your credit history, your work, income, expenditure, how many properties you own and everything else associated with taking a mortgage out as an individual. Furthermore, the lender may ask you questions about the company itself, such as the number of directors on the application, and how many shareholders the company has.
This does mean that the lender has a bit more work to do, as they have to look at both you and the company. This extra work generally means higher fees. It’s up to you (seek out the opinion of a professional tax adviser) to calculate whether an SPV would be beneficial in the long run for preferential tax rates.
Lenders might also want to know about your experience as a landlord, as inexperience can be seen as a risk. They will want to know that you can find tenants, look after the property and repay the mortgage.
You might want to seek out independent legal advice from a solicitor relating to the personal guarantee you will be signing. This assures the lender that you know what you are signing up for, and that you won’t backtrack by claiming that you weren’t aware of what you were signing. This should be a solicitor that isn’t the solicitor acting for you in the purchase.
Furthermore, your own solicitor may charge more for the purchase, for the same reason that the lender’s fees will be higher – they have to deal with both you and the company.
Loan to values start at around 85% for BTLs, but vary depending on your circumstances. For example, you might need to give a larger deposit if you’re a first time buy-to-let landlord, or if there is a bad credit history.
If you have another trading company, for example, you own a construction company, it can be easier to transfer the deposit as an inter-company loan. So rather than drawing the money out personally, there is one simple transaction between your construction company and your new SPV.
As a general rule of thumb, the most favourable rates are reserved for individuals and not for limited companies. But recent tax reforms have led to a surge in specialist lenders who are now opening their doors to SPVs. As the market is changing so rapidly, in all likelihood there will be a package to suit your needs.
It isn’t that complicated, but it’s important to seek professional legal, tax and mortgage advice before making any decisions.
If you are considering taking out a mortgage through an SPV, speak to a professional mortgage broker who specialises in these types of mortgage and can save you time by matching your needs with a lender who will likely approve your application and source you the best rates, depending on your circumstances.