BTL market

The march of limited companies in the BTL market

In an attempt to help first-time buyers and boost home ownership, numerous policy changes have targeted the buy-to-let market and the purchase of second homes since 2015.

Perhaps most notably, the 2015 Autumn Statement saw the then chancellor George Osborne announce a 3% stamp duty land tax (SDLT) on buy-to-let purchases. This came into effect in April 2016, causing an upheaval within the market.

In addition to private investors and those purchasing a second home – either for themselves or another family member – those hit by the SDLT changes included large-scale investors.

However, the bad news did not end there for landlords. As of April 2017, mortgage interest relief has been gradually reduced from 45% to the basic rate of tax for second homeowners and buy-to-let landlords.

Despite this rather gloomy outlook, this change does not affect limited companies, which can still offset 100% of their mortgage payments. In addition to this, no income tax is payable on retained profit, meaning more money is available to reinvest. Although corporation tax is still payable, this is still lower than the higher rate of income tax payable by an individual.

It is, therefore, not surprising that investing in limited companies operating in the buy-to-let market has grown in popularity.

In October, Mortgages for Business found that in Q3 2017, 79% of buy-to-let mortgage purchase applications were being made via limited companies. According to the latest edition of the Limited Company Buy to Let Index, this represented an increase of 6% over Q2.

Commenting on the figures, Steve Olejnik, COO at Mortgages for Business, noted that: “There was, unsurprisingly, a spike in SPV registrations last year.”

He added that: “The 2015 Summer Budget has noticeably sped things up, with 2015 and 2016 showing the strongest growth in registrations in the sample, whether proportionally or in absolute terms.”

However, there exist some disadvantages investors ought to be aware of. For example, only a limited number of lenders offer mortgage products for limited companies. The Q3 2017 Limited Company Buy to Let Index showed that of the 36 buy-to-let lenders on the market, only 42% were offering products for limited companies. In addition, although the number of buy-to-let mortgage products on the market increased by an average of 13 products across the quarter to 1,233, the number of products available to limited company borrowers fell to 263; lower than Q1 and Q2 of 2017.

The index also noted that the rates available to limited companies were “still somewhat above the market average, as the cheapest products are typically offered by lenders without the systems or underwriting skills in place to offer products to limited companies”.

Indeed, Private Finance recently highlighted the danger of the higher interest rates faced by landlords setting up limited companies. It found that only landlords with four or more properties benefited from a limited company structure.

Shaun Church, director of Private Finance, said: “Landlords shouldn’t rush into this assuming it’s a safe bet for saving money. Limited company mortgage products are available through a handful of smaller lenders, resulting in higher rates compared to personal borrowing. Investors need to drive down mortgage costs as much as possible to prevent this from eating into their profits.”

Nonetheless, the index found that “the softer affordability testing that is commonly applied to limited companies” led to higher-than-average loan amounts.

Titlesolv policies can be instrumental in enabling the buy-to-let deals to progress where mortgage lenders are being cautious about those transactions in respect of which there are question marks over the title.

Titlesolv is the trading name of London & European Title Insurance Services Ltd authorised and regulated by the Financial Conduct Authority.

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