Mortgage Issues for Landlords Using a Company Structure

Mortgage Issues for Landlords Using a Company Structure

Following the Osborne tax assaults on landlords, many property investors have increasingly set up company structures for their new residential property investments. They have done this in order to avoid the tax impact of the Section 24 changes brought in by the landlord-hating former chancellor. We have written much about Section 24 and tax at other blog posts.

It is true, that for now at least, for new investments, a company structure does have many advantages. (However, bear in mind that the tax regime can change quickly, and it is not outside the realms of possibility that Section 24 could one day be extended to properties purchased in a company structure – though see the Footnote!).

But we are where we are, for now!

Landlords Using a Company Structure

But what about the choice of mortgages for those buying property in a company structure?

Within a company structure, the choice of mortgages is slightly more limited and interest rates and arrangements fees tend to be higher, though this is slowly changing as more lenders wake up to the fact that there is now a high demand for mortgages on properties owned by a company. Indeed, for those mortgage lenders that offer both ways of doing it, the gap between arrangement fees and interest rates for mortgages in a company structure compared to in a personal name has narrowed considerably. This is especially true for the private banks, particularly for those borrowing large amounts.

But alas, there are still a lot of lenders, (mainly building societies and some larger high street banks), who are not “up with the game” and who still don’t offer mortgages for property bought in a company structure.

This inevitably lessens competition, which means you still have to pay a slightly higher arrangement fee and interest rate than if you buy as an individual.

Most lenders will usually require purchasers to use a separate Special Purpose Vehicle (SPV) arrangement – in other words, a company used solely for buy to let property and which is not allowed to do any other sort of business activity. Be aware, though, that whilst some lenders are OK with an SPV owning more than one property, others will allow just one property per SPV. Also, lenders will normally insist on personal guarantees too.  (Note that whilst the retail arms of the old school high street banks are often iffy and inflexible about buy to let loans in general, their commercial arms are often far more amenable and may lend to companies using a separate Special Purpose Vehicle.

Landlords Using a Company Structure for Existing Properties

What about existing properties that a borrower is thinking of moving into a company structure?

Here, borrowers would need to redeem any existing mortgage they have on those properties and apply for a new mortgage in the company’s name. This will always be easier to do if the lender is one and the same, indeed, the lender may help ensure a smooth transfer. However, even if the lender is the same, the interest rate will likely be higher and fees will certainly be incurred. A new application will be required.

Of course, the main deterrent to doing this will usually be the 3% Stamp Duty Land Charge that will apply and the crystallising of a Capital Gains Tax liability.

One ray of sunshine to note is that because the tax on companies is, (for now), much less harsh, many lenders now apply a lower rental income to interest ratio, (say 125% compared to 145%), so it may be possible to borrow more for properties that are held in a company structure.

Portfolio Landlords

Keep in mind that if you have four or more mortgaged properties, your lender will now have to do more detailed checks on you and your business model, including cash flow forecasts and the like. This follows Prudential Regulation Authority (PRA) rule changes in 2017. Many lenders will apply the 145% rental cover ratio for these, so called “portfolio landlords”. This can add to lead times, so we advise people thinking of doing this to keep their financial records up to date.

Again, many of the more “dabbling lenders” will still not lend to portfolio landlords, as they deem the workload too much. Their “computer says no” driven approaches are often just not geared up for the underwriting challenge posed by portfolio landlords. So, once again, this has the effect of reducing the level of competition and tends to mean higher arrangement fees and interest rates for the borrower, whether the holding is in a company structure or if it’s in the borrower’s own name.

Footnote: It’s unlikely that the more beneficial taxation of landlords within a company structure could be altered in the short term, as this would also effect the institutional investors in the private rented sector (PRS), who, it seems, are so beloved of the government. Unless, of course, there was a way found in which the “nasty” Mom and Pop landlords could be hit by a tax hike, whilst the big City players were exempted. This is eminently possible! We have always said that the Osborne tax changes were really more about helping the government’s City investing friends to get an advantage over private landlords in the PRS, than about “levelling the playing field” for first time residential buyers of property. 

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