Gary McKenna, consultant mortgage broker at Mortgages for Business explains the difference between a trading limited company and an SPV, and examines the buy to let mortgage options available for both.
The number of investors opting to finance their buy to let through a limited company is on the rise. Here are some answers to the most common questions I get asked by investors thinking of going down this route.
What is a trading limited company?
A trading limited company is a legal structure set up to run a business. The company takes responsibility in its own right for everything it does and its finances are separate from your personal ones. Owners of a private limited company are legally responsible for its debts only to the extent of the amount of capital they have invested. As the “trading” suggests, these companies are active trading vehicles.
Here is an example of someone who uses their trading limited company to invest in property:
An IT consultant sets up a private limited company. He uses the company to run his IT consultancy. He also uses the company to invest in buy, sell and rent out buy to let property.
What is an SPV limited company?
A Special Purpose Vehicle (SPV) limited company is a non-trading company that exists solely for buying, selling and letting property.
Here is an example of someone who uses their SPV limited company to invest in property:
An IT consultant sets up a limited company from which to run his IT consultancy. Separately, he also sets up an SPV limited company from which to buy, sell and rent out buy to let property. For tax and accounting purposes, the operation of and income from both companies are separate.
Which one should you use to get a buy to let mortgage?
From a lender’s perspective applications from SPVs are quicker and more straightforward to underwrite than applications from trading limited companies which require a greater level of understanding by the individual underwriter.
Because of this there are more options available for SPVs and the pricing tends to be lower, so personally, I would urge those looking to invest in buy to let property to do so through an SPV rather than a trading limited company.
Saying this, there are still good options for trading limited companies, although to achieve the competitive rates your business will need to be strong financially and have at least two to three years of accounts.
With either option lenders will require full personal guarantees from all of the directors.
As I write (23rd November 2015) there are currently 95 products available to SPV limited companies and 10 products available to trading limited companies, equating to around 10% of the entire buy to let market. In my opinion this figure is only set to rise with more and more landlords now looking to borrow via a limited company, due to the proposed changes to tax relief on finance costs for individual landlords.
How do you go about setting up an SPV?
You can get your accountant to do this for you or do it yourself. If you do it yourself, you can do it online very quickly on the Companies House website or by post using an IN01 form. More detailed information and the appropriate links can be found on the Government website, gov.uk.
It is also worth noting that most lenders will only accept SPVs with a maximum of four directors/shareholders.
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Gary McKenna has left Mortgages for Business for pastures new. For more information or for any questions relating to this blog, please contact the Buy to Let Team on 0345 345 6788, where one of our consultant mortgage brokers will be happy to assist.