How corporate structures are transforming the buy to let landscape
By Keystone Property Finance
Not so long ago, if you mentioned the idea of managing a property portfolio through a limited company you might have received a funny look.
However, over the past decade they have gradually become the default vehicle for many landlords.
According to Hamptons, the estate agent, the total number of registered buy to let companies has jumped 363% to more than 443,000. In fact, the firm estimates that around three-quarters of all buy to let purchases are now made through a limited company.
What has fuelled this shift? What structures do landlords use? As brokers, what should you understand before submitting a limited company case?
The turning point was the 2015 Summer Budget, when then Chancellor George Osborne announced restrictions on mortgage interest tax relief for landlords under Section 24 of the Finance Act.
Before the change landlords could deduct their entire mortgage interest from their rental income before working out their tax. This was replaced with a flat 20% tax credit.
The move hit higher and additional rate taxpayers hardest as it meant that they had to pay tax at their marginal tax rate on a higher net profit. It also meant that landlords effectively paid tax on their gross income, which pushed some basic rate taxpayers into higher tax brackets.
Crucially, the changes did not apply to landlords purchasing or managing a portfolio via a limited company, hence their increasing popularity.
The term ‘limited company’ has become a catch-all term for anyone purchasing through a company vehicle. But there are many varieties that both brokers and landlords should know about.
Special Purpose Vehicles (SPVs)
The vast majority of incorporated landlords operate through a Special Purpose Vehicle, which is a company formed solely to hold and manage property with no other trading activity.
SPVs are quick to set up, widely accepted by lenders and straightforward to underwrite precisely because their scope is limited. They also offer planning flexibility, as retained profits can be reinvested into further acquisitions and directors can choose how to extract value in a tax-efficient way. In more sophisticated arrangements shareholding may sit within a holding company or family trust.
Trading limited companies
Some landlords hold property within an existing trading business. For example, a retailer may own residential property in the same or an adjacent building.
While there is nothing wrong with this sort of arrangement, many lenders won’t lend on them as non-property trading activity adds complexity to underwriting.
Limited Liability Partnerships (LLPs)
LLPs are used by some landlords, particularly where family members are combining resources or in professional firms such as accountancy or legal practices.
They can offer structural flexibility, but lenders must assess the financial position of each partner individually and often require personal guarantees. Only a handful of specialist lenders, such as Keystone will lend against this structure.
Unlimited companies
Unlimited companies are extremely rare but they do exist. At Keystone, we have seen just a handful of these cases in the past decade.
They function similarly to limited companies but without the cap on shareholder liability, meaning personal assets can be called upon if the company cannot meet its debts. Their principal benefit is privacy as they are not required to file accounts at Companies House.
They are so rare that many lenders do not have criteria to accommodate them.
What brokers need to know
Limited company cases demand more preparation than personal name applications. For SPVs check the Standard Industrial Classification (SIC) code registered at Companies House. Most lenders will only accept property-related codes such as 68100, 68209 or 68320. If the code is incorrect, it can cause delays or even a decline.
Brokers should also look beyond the company itself to its wider connections. Using Companies House and commercial search tools, it is worth establishing whether directors or shareholders have links to other businesses and whether any carry outstanding defaults or County Court Judgements. Lenders will run these checks regardless, so having the information to hand from the outset keeps things moving.
Where a company has multiple shareholders, understanding who holds voting rights and therefore significant control will determine whose details are included on the application.
As limited company buy to let continues to grow, brokers who understand the nuances of these structures will be consistently better placed to deliver for their clients.
For adviser use only. Please note this content has been supplied by our lender partner and as such, is their responsibility. No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this article.