There are many things to consider when looking at a new buy to let investment property; house or flat; furnished or unfurnished; new build or period property?
One thing you may not have thought about, but could have far reaching consequences, is how you actually own the new house.
Either you can buy the property in your name in the same way that you would own your own home, or you could buy the new property within a limited company specifically created for that purpose – this is called a Special Purpose Vehicle (SPV).
As with any investment choice there are advantages and disadvantages to doing this, and it is imperative that you consult with your tax adviser, financial adviser and mortgage broker before embarking on buying a buy to let property, so you can be certain you are doing the right thing for your situation.
Ideally, think about approaching a mortgage broker with strong links to (or even part of the same group) as a financial adviser, so you have all your advice under one roof.
To help you work out if an SPV could work for you, we’ve put together a quick overview of the advantages and disadvantages.
Advantages of Buying via an SPV
1. Potential tax savings – because you can control how much income is taken out of the limited company you can keep monies in the SPV if it is not needed, and therefore reduce your potential income tax liability.
2. Changing ownership is easier – The Company will own the house or flat, but the directors can be changed relatively quickly with few tax implications, (although there could possibly be inheritance tax liabilities). Therefore you can add or remove directors to suit your situation. This is very useful if you are gifting assets to a family member, although you will need to consult a professional tax adviser to make sure there are no Inheritance Tax implications
3. Using the same SPV – you can utilise the same company for as many properties as you want, which results in reducing admin costs, and allowing you to build a portfolio within one entity. If you plan to buy a number of Buy to Let properties, then buying through an SPV offers you more flexibility.
So far so good, but what about the negatives?
Disadvantages of Buying via an SPV
1. Stamp Duty Land Tax – Changes to the stamp duty rules in the 2014 budget which were brought into force for land transactions on or after 20th March 2014, now mean that you will pay 15% tax on all purchases over £500,000; therefore I think it unlikely that anyone would want to buy above that level. Below half a million standard stamp duty applies: 1% for properties up from £125,000 to £250,000, and 3% on properties from £251,000 to £500,000.
2. Lack of choice – there are only a few lenders who will entertain an SPV purchase, and these tend to be the more specialist BTL or commercial lenders. There are around twenty-five lenders in the BTL market at present; from these, seven will look at a limited company purchase.
3. Cost – partly due to the restricted market and partly due to the extra work involved, SPV mortgages are always more expensive than standard personal ones, both in terms of rates and fees.
4. Personal Guarantees – most lenders will require a personal guarantee from the directors of the Ltd Co, so if the property is repossessed and the mortgage is not fully cleared you can still be liable for the debt.
There are some negatives, which can impact very heavily, so making the right decision is key. When you are talking to your accountant/tax adviser ask them to provide a model for the level of tax that you might pay if you owned the property in your own name, against the tax payable if you owned it through an SPV. Your mortgage broker can provide quotes for buying personally or buying commercially, so you can have an understanding as to what is best for you.
The information contained in this article is for general information purposes only, and should not be considered as advice. Any reliance you place on such information is therefore strictly at your own risk. All content correct at date of publication. Your property may be repossessed if you do not keep up repayments on your mortgage.