PROFESSIONAL LANDLORD
WHAT IS A PROFESSIONAL LANDLORD?
A Professional Landlord is an individual with more than 10 properties in their portfolio, and majority of their income is from rental properties.
Mortgage lenders will classify someone with between 4 and 10 properties as a portfolio landlord. Clients with one property up to three are small landlords.
In our experience a Professional Landlord with multiple properties, needs to ensure their buy to let property portfolio is structured correctly to ensure further funding, investment growth and restructuring is achievable.
Rental Property Structures
Many landlords with large portfolios especially, may have complex holding structures such as some units in personal names and others in Special Purpose Vehicle (SPV), Limited companies, partnerships or even offshore companies. The property portfolio can be solely residential, commercial or a mix.
Portfolio finance for professional buy to let landlords is not simply based on the interest rates that we will secure for you. We work with your accountant/personal representatives, to see the implication and risk on your personal taxes, company taxes and growth plans for the portfolio.
What we take into account when looking at re structuring for Professional and Portfolio property landlords with multiple rental properties:
- Number of properties in the portfolio outside of your own home
- Value of the property portfolio as a whole and as individual units
- Which properties have a mortgage and are coming to end of any fixed periods they may be in (to avoid paying unnecessary lender penalties)
- If any of the the property portfolio is coming to the end of the mortgage term and the mortgage may need to be repaid to the mortgage lender
- What rental income is being generated and rental yields
- What the mortgage repayments are
- How much much money is needed
- Type of properties – commercial, residential flats, houses, or a house which may be split into individual units – known as a multi unit block (MUB or House of Multiple Occupation HMO)
- Any other finance secured on the property portfolio, apart from a mortgage ( second charge/ bridging/ guarantee for another loan)
- What money or other income outside of the property portfolio the client has access to for example any other investment income, work income and do they file a tax return to evidence the income
- Any additional cost associated with the property portfolio such as letting agents fees
- What they want to achieve – short term and long term. Are they looking to sell any of the properties now or in the future and invest the money elsewhere?
- Purpose of having buy to let properties – investment for capital growth with the view to sell and cash out in the future or to provide rental income now or in retirement. Rental property can work well in either case.
Examples of Restructuring
EXAMPLE 1
You may want to release some money from the equity in your properties, to invest in more properties to grow your property portfolio. You may want to move the lending around to reduce/ pay off some of the mortgage debt or loans you have on some the properties, or a specific property which you feel is a good long term investment and want to reduce or repay the borrowing on it.
EXAMPLE 2
Your current loan/ finance/ mortgage facilities are with multiple lenders and we are able to bring the whole facility to one lender, offering you favourable rates and terms.
This will depend on the portfolio type (residential, commercial or mix) and gearing (your exposure in terms of outstanding lending to portfolio value).
EXAMPLE 3
You currently have 4 properties in your personal name and an SPV for the remaining portfolio. You would like to bring the properties in your personal name over to the existing SPV or a new one.
This type of restructuring finance can have associated costs such as stamp duty, capital gains, lender costs (valuations and lender fees) and this would be a major consideration when looking at this.
You will need direction and accountability from your accountants and solicitors. We we would work along side them to make this possible, if it the route you choose.
EXAMPLE 4
You have a large property portfolio and are thinking of expanding.
Your current lending facility is up for renewal and you would now like a credit line to grow your portfolio and purchase more properties.
This scenario will be dependant on the value of your property portfolio, how much equity you have available and the rent you are achieving.
This will allow you to draw down on the fund as and when you have found a property so you can buy to for cash and only pay interest on the amount of money drawn down. There maybe a small non-utilisation fee charged by the lender if the funds are not used.
For this type of lending, terms, rates and how much money you are able to release from your portfolio will depend on the risk appetite of the lender.
EXAMPLE 5
You would like to restructure your lending facilities to clear the borrowing on some of your portfolio and gear up on the remaining, and look to possible reduce your mortgage payments with securing lower rates.
This scenario works well for professional landlords who wish to have some of their properties unencumbered (mortgage free) and provide a cushion against any falls in the rental market.
Again as with many of these scenarios as long as the property/ properties you would like to be used for lending have enough equity, this can be achieved and with good rates and terms, either through a mortgage or other finance arrangement.
Transferring property from personal name to an SPV Tax Changes and Mortgage Interest Relief
Since the government completely phased out mortgage interest tax relief for buy-to-let properties owned in personal names, in April 2020, there has been a growing interest in limited company buy-to-let.
As corporate entities are not subject to the same tax relief restrictions, some landlords are considering whether using a limited company to run their business may be the most tax efficient way of holding property.
For Ltd Company or SPV structure, you can still deduct mortgage interest costs, and other expenses from the rental income generated. Hence the reason many professional landlords are acquiring properties in this way.
We strongly recommend you seek professional advice from a specialist accountant before deciding what is the best option for you.
REGISTERING A NEW LIMITED COMPANY
Setting up a new limited company is a relatively cheap and simple process which can be done online via the Companies House website.
This process is called ‘incorporation’. Alternatively, you may wish to employ an accountant to carry out this service.
To incorporate your new company, you will need the following:
- An appropriate company name
- A designated company address
- At least one company director
- Details of shareholders – you need at least one
- Shareholders to agree ‘memorandum and articles of association’ which establishes the company and its written rules
- Details of any shareholders with more that 25% share or voting rights who have significant control over the company
- The SIC code which identifies what the company does
SETTING UP AN SPV
Most buy-to-let mortgage lenders will require the company to be set up as a Special Purpose Vehicle (SPV) which is a type of limited company registered to trade in one principle activity in order to lend money on it.
In the case of a buy-to-let property business, this would be a company that receives income on the form of rent from the letting of residential property.
There are a number of SIC codes that are commonly associated with SPVs which can be used to register the new company and are normally accepted by buy-to-let lenders:
- 68100 Buying and selling of own real estate
- 68201 Renting and operating of Housing Association real estate
- 68202 Letting and operating of conference and exhibition centres
- 68209 Other letting and operating of own or leased real estate
- 68310 Real estate agencies
- 68320 Management of real estate on a fee or contract basis
TRADING COMPANIES
If your company is set up to trade in something other than rental property, there are mortgage lenders that will lend to a ‘trading company’ but the number of lenders and products to choose from the market is limited.
For existing landlords who are considering transferring their properties to any company structure, it is recommended that you seek advice from a specialist accountant before proceeding.
STAMP DUTY COSTS
Moving rental property from a personal name to a corporate entity involves a sale and purchase property transaction which means that Capital Gains and Stamp Duty Land Tax is payable.
Stamp Duty costs may be a deterrent to large portfolio landlords, but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again professional advice is recommended in this scenario before proceeding.
LARGE BUY-TO-LET MORTGAGES
This is a specialist type of lending, where we have provided our property landlords with unrivalled advice and presented solutions allowing our clients to purchase and re finance property.
Custom rental calculations and stress tests are not as stringently adhered to for large Buy-To-Let lending. Like Large mortgages for residential purposes, we find lenders have a more “overall” approach here and will look at your personal income and liabilities alongside portfolio risk.
The key point to highlight is how the loan can be serviced during void periods.
Advantages and disadvantages of using a limited company
Advantages
- Mortgage interest is considered an expense and can be fully offset against rental income received and Profits within the company are liable to corporation rather than personal tax
- Dividend allowance and directors’ loans can make withdrawing profit more tax efficient
- Profits can be re-invested to expand your portfolio without additional tax
- Options for inheritance tax planning between parents and children
Disadvantages
- There is no Capital Gains Tax (CGT) allowance when the company sells a buy-to-let property
- Reduced number of mortgage lenders and products to choose from on the market as some high street lenders do not offer limited company mortgages, or have fewer options
- Cost of finance may be higher as some lenders charge a premium for limited company mortgage applications
- Other costs associated with running a limited company such as preparing and filing accounts, auditing and legal fees
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