Paul Brett is managing director of intermediaries at Landbay
There are two types of company structures for buy-to-let investors holding property, with the most prevalent being a ‘limited company’, which is set up via a Special Purpose Vehicle.
The other less common company structure for BTL property is a ‘trading limited company’ and the two are very different.
The limited company SPVs have a SIC code (‘standard industrial classification’ of economic activities), and this indicates they specialise in property. The SIC codes used in BTL are usually 68100 for buying and selling of real estate, 68209 for letting and operating of own or leased real estate and 68320 for real estate management.
Trading limited companies can be any type of business, they do not have to be property related. They could be owned by the likes of property developers, doctors, dentists, plumbers or even brokers. If BTL investment is on their radar, instead of setting up a new SVP the owner/s could use their trading limited company to buy property.
It is possible for surplus profits within trading limited companies to be used as a deposit on a property accompanied by a buy-to-let mortgage to finance the remainder. Accountants will be able to advise if property investment is more financially efficient than taking money out of a company and incurring taxation.
It’s surprising how many trading limited companies already own a BTL property, usually unencumbered as they have used surplus profit to purchase. However, as with all trading company assets they may want to leverage the property to support the business – this is where capital raising within a trading limited company comes into play.
Of course, a company could apply for a business loan but the disadvantage is the bank may require a debenture over the company which can be very restrictive. A debenture is a loan agreement that acts as security for the lender over the borrower’s assets, including property, in case of default. In addition, a business loan will be capital and repayment over a short term, typically five years.
An alternative option is to take out a BTL mortgage on the property which potentially offers more flexibility and preferential terms than a business loan. The mortgage term can be up to 30 years on an interest-only basis, making monthly payments substantially lower.
From Landbay’s perspective, we underwrite applications from trading limited companies in the same way as a SPV. We take personal guarantees from the directors and substantial shareholders who hold more than 25% of the business – this can be up to four people – and we have first charge on the property.
Layered limited companies
At Landbay we have highly experienced underwriters and BDMs who understand how mortgages work for different company structures. Therefore, we can be flexible and will also consider lending to layered limited companies. This is where a trading limited company, perhaps a property development firm, owns a SPV subsidiary.
The client’s accountant should be able to advise on whether it is better to move the money or the asset out of the trading limited company into the subsidiary. We could potentially lend to either of the companies as long as they have the same ultimate beneficial owners.
Lenders who comprehend the complexities behind company structures and BTL lending are thin on the ground. But we are always happy to assist brokers with their clients’ needs and explain their options.