Our limited company conveyancing solicitors guide to help you purchase a buy-to-let property using a special purpose vehicle

Our guide for buy-to-let landlords looking to use a special purpose vehicle (SPV) to purchase their next property

Here at Trellows Investments we understand your desire to create a solid buy-to-let portfolio and want our clients to achieve this in the simplest and most tax efficient manner. Using a special purpose vehicle (SPV) as a buy-to-let landlord will help you obtain finance for your projects. The SPV presents fewer risks and liabilities for the lenders so they can present you with greater access to a wider range of mortgage products. Our conveyancing solicitors have a wealth of knowledge about the optimal ways in which to organize a buy-to-let portfolio and are available to offer you their expert advice.

A special purpose vehicle is a legal entity, often a limited company, which has been established for a specific purpose. It is created by a parent company or an individual to isolate financial risk when purchasing a property. In the property sector the term special purpose vehicle is given to a limited company specifically set up to buy and rent properties.

As a distinct company, with its own assets and liabilities, it maintains its own legal status. With this clearly separate position the company can make its obligations secure, even if the parent company goes bankrupt the special purpose vehicle can still carry on functioning. This is because the operations of the entity are restricted to the purchase and financing of specific assets or projects.

In the past, higher rate taxpayers could claim mortgage interest payments as an expense to reduce their tax bill and to operate via a limited company was rare. However, as of April 2020, landlords are no longer able to deduct any mortgage expenses from rental income to reduce their tax bill. Since the changes to interest and finance costs were announced, the SPV route has become far more appealing, even for smaller property investors.

Using an SPV company structure for a buy-to-let property is not suitable for everyone. SPV’s tend to be used by higher and additional rate taxpayers, and those who would have been basic-rate taxpayers but have been pushed into the higher rate bracket due to the changes. Using an SPV makes a massive difference for these individuals and can significantly reduce the amount of tax paid from their rental property income.

Special purpose vehicles are set up to be a tax-efficient way of landlords holding a portfolio of buy-to-let properties now that the changes to tax relief on finance costs for individual landlords have been phased in. Individual landlords are no longer able to reclaim tax on mortgage interest. Special Purpose vehicle buy-to-lets often find that lenders will offer more lenient rental coverage. Some key reasons to use a special purpose vehicle include:

Risk isolation – As a separate legal entity, an investor is able to isolate that property from the other assets and liabilities of the investor. This significantly lowers the risk as it is less affected by external factors.
Flexible structure – SPVs offer investors a flexible corporate structure for raising capital and regulating the activities of a group of investors who own a property. An SPV is able to raise capital by issuing shares. These multiple share classes can be created to regulate the rights of investors to profits and varied level of control over the SPV.

Ease of asset transfer – using a special purpose vehicle the property and contracts can be sold in a self-contained vehicle instead of requiring the seller to separately assign numerous contracts, such as lease, licences and permits, to a buyer following a sale.
Buy to let lenders offering mortgages to corporate vehicles mostly prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite and are perceived as being lower risk.

The process of setting up a special purpose vehicle is very simple and is no different to setting up any other company. As a well-established firm we have strong connections to accountants and so if you need assistance in your first steps to setting up a special purpose vehicle then we can point you in the right direction. We can work with the accountants to ensure the company is set up correctly. The extensive knowledge of our solicitors means you can rest assured that the limited company will be valid and successful in its purpose.

If you own property in your personal name and transfer it to your Limited company at a significant undervalue or for no consideration, you are liable to pay stamp duty on the market value of the property as opposed to the undervalue.

For example, you own a property that has a market value of £200,000 and transfer it to a company that you are connected to. The company only pays £100,000 for the property, which is below the market value for the property. Even though the company has received the property at an undervalue, they must pay the same amount of Stamp Duty as though you had transferred the company in exchange for £200,000.

This rule applies in either of the following situations:

The person who transfers the property is ‘connected’ with the company

OR

The seller is connected to the company and the company uses shares in the company to pay for the property

However, these rules do NOT apply if you are NOT a connected person. For more information on the rules about a connected party, please consult the HMRC website here.

To learn more about buying a property in a limited company and how we at Starck Uberoi can help read our other blog entitled Conveyancing for Limited Company purchases.

One of the main reasons people choose to purchase a property in a limited company is because you are no longer able to claim mortgage interest tax relief if the property is held in the landlord’s personal name, following the changes implemented after 2016. Landlords who own a property and declare rental income through a limited company are still able to reclaim tax on their mortgage interest payments. This tax relief could help you save thousands.

Perhaps you have recently bought or inherited a new property beside the one you already live in and intend to rent it out. Buy-to-let properties are a superb investment which allow you to collect a long-term income from a property. There are a few things, however, that you should know in advance before looking for a buy-to-let mortgage for your property.

It is crucial to get the correct advice, before embarking on the journey to forming and SPV.

We have our own in-house independent mortgage advisers, as well as a partner company, who can conduct all due-diligence along with the conveyancing. 

Becoming a landlord was only an option for the very fortunate, but now it is becoming an option for more people than ever. While they take some maintenance, buy-to-let properties are a fantastic long-term investment which can generate regular income and is fairly low-risk in comparison to investments such as stock market shares. For those who are self-employed, contractors or freelancers, a buy-to-let property can also promise a stable income throughout the periods of which you aren’t working.

There are two types of profit you can earn from your buy-to-let property:

Rental yield: the money earned from rental income
Capital growth: profit earned from the sale of the property

Buy-to-let mortgages tend to be a bit more expensive than normal mortgages, as they are a bigger risk for the lender – you may not make back enough money in income to repay the loan, or the value of your property may sink. Furthermore, the majority of them are interest-only, meaning you only pay back the full amount of the loan when the property is sold.

There are also some additional criteria you must satisfy to be able to qualify for a buy-to-let mortgage.

Some buy-to-let mortgage lenders have certain requirements which differ from normal residential mortgages. As well as standard affordability checks and a good credit score, you may need:

To already own your own home: You do not have to have paid off your mortgage entirely, although bear in mind if you still have an outstanding mortgage you will need to pay both an annual salary of above £25,000: some lenders have minimum income requirements.

A common minimum salary requirement is £25,000, although if you are applying with somebody else the lender may only require one applicant to be earning over £25,000 or that you have a joint income of over £25,000. Despite the fact that earning less than £25,000 restricts you from using a lot of buy-to-let lenders, there are some lenders that have no minimum income requirements.

To be under a certain age: Many lenders have an age limit that you must not exceed before the end of your mortgage term. For most lenders, this number is around 75, though it can be as low as 70 for others. For those lenders that will lend into later life they may require you to be of a certain age at application and sometimes provide proof of pension.

To pay a larger deposit: You may be required to pay between 25-40% of the property’s total value as a deposit. This is because the majority of buy-to-let mortgage lenders will only lend up to 75% of the property value.

To have an assured shorthold tenancy (AST) in place: Not all lenders require this, but some ask for an AST to already be prepared in advance before they will offer a mortgage. Speak to your lender to ask what their requirements are. This is more common on re-mortgages, as a mortgage lender will not expect you to have an AST when purchasing a buy to let property.

Once you have secured your mortgage, you need to ensure that the property is in an acceptable condition before you can start searching for any tenants. For more information, please see our blog entitled Landlord Solicitors London.

The amount you can borrow from a buy-to-let mortgage depends on how much rental income you expect to receive. In most scenarios, your expected rental income will need to be at least 25% higher than your mortgage payments; you can find out how much rental income you can expect by checking with local letting agents and online to find out how much other properties in the area make.

As with any long-term investment, there are some risks you need to be aware of when considering getting a buy-to-let mortgage:

Null periods: If your property is left vacant for a prolonged period of time, you will not receive any income from the property and still be expected to keep up with mortgage repayments or face going into arrears.

To protect against this, ensure you have enough money saved to cover a few months without a tenant.

Higher interest rates: Because the majority of mortgages are interest-only, you may find the interest rate on your mortgage quite high. Make sure you spend enough time looking for the best deal. Our mortgage advisors have a wide knowledge of the entire market and can find you a mortgage deal with the best possible interest rates.

Maintenance costs: As a landlord, you are responsible for the upkeep of your property. Costs can pile up should expensive work need to be done or if you have a bad tenant.

Unregulated: The majority of buy-to-let mortgages are not regulated by the Financial Conduct Authority, except when the owner intends to let the property to a close family member. Therefore, it is essential that you read the terms and conditions thoroughly before agreeing to your buy-to-let mortgages – our mortgage advisors can help you go through the mortgage terms with you and help you avoid any pitfalls.

Prices may decrease: as with any investment, it is a gamble whether property prices will increase or decrease. If the value of your property decreases, you will have to make up the difference if the sale profits do not cover the total value of your loan. Do not rely on selling your property to pay off your mortgage – ensure that you have enough funds to cover the difference should you have to sell the property at a loss.

If you do not want to remortgage your property to a buy-to-let, you can acquire a consent-to-let agreement instead. A consent-to-let agreement gives you the right to rent out a property while maintaining a residential mortgage, and they are usually given in circumstances when the homeowner is moving out of their property for a short period of time and want to rent out their home during their absence.

Consent-to-let agreements allow you to gain rental income from your property without having to take the risks associated with a buy-to-let property, as the lender will only offer a consent-to-let agreement if they are confident that the rental income you expect to receive will cover costs. However, it is not necessarily cheaper to get a consent-to-let property: while the interest rate will be lower, some lenders may charge a fee for a consent-to-let agreement and/or charge an additional percentage fee on top of your normal rate.

In light of the recent coronavirus pandemic, many property owners have unfortunately been forced to move from their properties. While this is a good opportunity to let your property while you are living elsewhere, you still need your mortgage lender’s consent before you can rent your property to anyone else. For more information regarding consent-to-let mortgages and covid-19, please read our blog.

The taxes you will need to pay include:

Income tax: – The income you receive from renting your property is still subject to income tax, and must be declared on self assessment tax return for the year it was earned in. This will be taxed depending on your income tax band, at either 20%, 40% or 50%.

Capital gains tax: – You will need to pay capital gains tax, which is at either 18% or 28% depending on your tax band. This will be paid if you sell your property for over £12,000. You must declare any gain from selling your property on your self-assessment tax return for the year