We have seen a significant rise in the number of limited company buy-to-let applications being submitted. Since the beginning of 2019, over 25 per cent of new mortgages each month have been in the name of a Special Purpose Vehicle (SPV) or trading company.

Limited company benefits

This comes as no surprise as there are several benefits to using a corporate structure for running a buy-to-let property business. Many landlords opt to use an SPV as it can be financially advantageous and tax efficient. Since the government announced the phasing out of mortgage interest tax relief by 2020, there are now more reasons to consider the limited company route to reduce tax liabilities.

In terms of buy-to-let mortgage options, limited company products can also provide advantages to landlords as the PRA regulations relating to rent stress tests for personal applications are not applicable (a rent stress testis the calculation that lenders use to determine how much they will lend to you).

It means that the rental calculations can be more achievable for SPVs – typically at 125 per cent at 5 per cent or at the pay rate for 5-year fixed rates – which may allow applicants to borrow more through a limited company.

Wide choice of mortgages

There is growing competition among lenders for limited company buy-to-let – we currently have around 30 different lenders on its panel - which means that there are some keenly priced rates available. Historically, limited company mortgages were considerably more expensive than personal name rates,but the gap is closing with some lenders now offering the same rates for both applicant types.

Setting up an SPV is a simple, cheap process which can be completed online within 24 hours via Companies House. Most lenders will lend to newly established SPVs providing they are set up for the sole purpose of letting and managing property. For this reason, it is important that the limited company is registered with the correct SIC code – normally 68100, 68209, 68320 or 68201.

Stamp Duty costs

For existing landlords who are considering transferring their properties to an SPV it is recommended that you seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable.

Stamp Duty costs may be a deterrent to large portfolio landlords,but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership– again tax advice is recommended in this scenario.

We expect the proportion of buy-to-let mortgages arranged via a limited company will continue to grow over the next 12 months as landlords realise the financial ramifications of the changes to mortgage interest tax relief once it is phased out completely in 2020.

Research shows that in 2018 over half (59%) of England’s landlords are aged 55 years or older and one third are retired. Buy-to-let lenders have started to incorporate the market’s age demographic into their lending policies by identifying the pitfalls for later life applicants and then implementing the necessary changes to remedy this.

Potential pitfalls

Lenders impose a maximum number of years an applicant can have a loan for and so for older applicants the loan term may be restricted. This in turn could affect the affordability of the loans as shorter terms might equate to higher monthly payments. It is worth checking how lenders assess affordability, particularly whether state pensions are considered when calculating minimum income criteria.

The solutions

Lenders are changing their criteria to make buy-to-let finance more accessible to older landlords. For example, some lenders no longer stipulate a maximum at application or completion. There are also longer-term fixed rates up to 10 years which can offer affordability relief and security of monthly payments. Variable and lifetime products may also provide a solution. Pensions including private, widow’s and war pensions are becoming more widely accepted by mortgage lenders and existing landlords may also be able to use rental income in their income credentials.