Here at HCM we speak with a lot of people who want to buy their holiday let through a limited company, and the first question we often ask is: ‘Why?’ There’s a lot of misconceptions and inaccurate information around this topic, and it’s important to understand the facts before making any decisions.
Covering everything from tax benefits to legalities, our comprehensive guide answers the biggest questions you may have about using a limited company to purchase a holiday let.
Why go through a limited company?
First things first, let’s deal with one of the biggest misconceptions: ‘I need to buy via a limited company in order to offset my mortgage interest.’
The idea of buying residential property through a limited company was somewhat accelerated by buy-to-let landlords, following punitive changes to the way in which they could account for mortgage interest. These changes dictated that landlords were no longer permitted to offset their full mortgage interest against the profit of their buy-to-let. Shortly, this will get to the stage where landlords can only claim a basic rate tax credit, in place of what was full mortgage interest offset.
The way to get around this problem was to purchase a buy-to-let through a limited company, which aren’t governed by those same rules. Inside of a limited company, you are able to offset the mortgage interest against your profit.
However, the reality for holiday lets is different as they are not treated the same as buy-to-lets. When a property is deemed to be a furnished holiday let under HMRC’s guidelines, it is considered by HMRC to be a business. As such, there is no limit on the amount of mortgage interest that you can offset against your profits.
So, if someone came to HCM and said, ‘I want to purchase a holiday let through a limited company so that I can offset my mortgage interest,’ we would reply that, contrary to their understanding, you do not necessarily need to go through a limited company. Read more about mortgage interest and holiday let tax benefits here.
Now, let’s consider some of the more valid reasons why you would want to use a limited company to purchase a holiday let.
Reason one: so that you can choose when to declare profit
If you’ve bought a holiday let through a limited company, then the profit it makes will stay in that limited company until you take it out – and you can make the decision when to do this.
Let’s say you’re a contractor whose income goes up and down; it might be that you keep all of your profits inside the limited company until your contracting day rate job isn’t going so well and you have low tax rates. You can then pay yourself dividends out of the limited company – in other words, you are managing your tax.
When you run your holiday let in your personal name, on the other hand, you have no choice but to declare your full profits for that year in your tax return.
It’s common for people to want to stay in control of their tax, and running your holiday let through a limited company is a legitimate way to do this – you don’t have to declare all of your yearly profits and face your tax bill increasing even more.
Reason two: to build a holiday let business
It could be that you have ambitions of owning numerous holiday lets and want to create a limited company to run them all through. By building a portfolio of properties inside one limited company, there are financial benefits.
The idea is that you buy the first property and with the profits you make, can buy the second one. Then with the profits from those two properties, can buy the third one, and so on. In other words, you can reuse your returns to form the mortgage deposit of your next property.
Reason three: inheritance tax planning
You might choose to buy through a limited company for future inheritance tax planning. This is a more complex topic and we would refer you on to an accountant to deal with this.
When you decide to use a limited company
So, you’ve made the decision to buy your holiday let through a limited company! Here are some things you should know…
You’ve got to incorporate and administer the company which involves various costs. Once you’ve established a limited company, you also have to ensure that it abides by all the necessary rules and regulations. For example, you have to submit an annual confirmation statement, accounts, and a corporation tax return. Generally speaking, most people use an accountant for these tasks – this is one of the recurring costs that you’re likely to incur when you run a limited company.
Typically speaking, where a limited company is the mortgage applicant and purchaser of a property, the holiday let mortgages will be more expensive. This is because the process is a little more complex and lenders don’t necessarily like lending to limited companies, as they perceive more risk than when lending to an individual.
Holiday let mortgages for limited companies
If you’re planning on buying a holiday let through a limited company, it’s advisable to speak with an expert, such as HCM, before you go full steam ahead and start setting things up. This is because there are a number of requisites which most people are not aware of.
Number one: mirroring
The applicants to the mortgage normally have to be the same as the director and shareholder of the limited company – this is known as mirroring.
Let’s say that it’s a husband and wife team – both parties will be named on the mortgage application and as such, they must both also be named as directors and shareholders of the business.
Even though the limited company will technically be the buyer, the directors have to give personal guarantees. This means that if the limited company gets shut or sold, is closed down, or becomes bankrupt for example, it doesn’t matter – the mortgage provider will come for the directors.
Number two: setting up a limited company
The limited company is often referred to by mortgage providers as an SPV – a ‘Special Purpose Vehicle’. The limited company has to be set up in a certain way, adhering to certain rules, to qualify as an SPV.
The SPV has to be set up with a specific Standard Industrial Classification code – SIC code. The SIC code tells you what the limited company is allowed to do, and it must be one of three main types:
- 68100 Buying and selling of own real estate
- 68209 Other letting and operating of own or leased real estate
- 68320 Management of real estate on a fee or contract basis
For example, if a limited company is set up as a trading company, it would not qualify as an SPV and could not get a holiday let mortgage. It is also dictated that the limited company must have been correct from the beginning, meaning that it can’t have been used for regular trading or something similar once in the past and then changed.
Generally speaking, the SPV will be an existing entity with existing properties, or, it is a newly incorporated company. It must also have a company bank account and has to be incorporated in the UK (some lenders limit this just to England and Wales).
Number three: no layering
There are so many self-employed people nowadays that a lot of people have limited companies.
Let’s say that you’re a vet and have a veterinary practice limited company. You might be advised, in this situation, that the best thing to do is to set up an SPV that is owned by your limited company.
This is called layering; when you’ve got a limited company owning the shares in the SPV, either in part or in full. The problem is, the vast majority of holiday let mortgage providers will not allow it.
When a limited company owns some or all of the shares in the SPV, you essentially create a group company structure, and many mortgage providers don’t like this.
When it comes to ownership of the SPV, it generally has to be in the individual’s name – as mentioned above: mirrored, personal ownership. There are mortgage lenders who will deal with more complicated applications where quirks such as layering are involved, but you should expect the rates to jump up.
How to get your mortgage deposit into the SPV
When it comes to putting your holiday let mortgage deposit money into your SPV, there are generally only three accepted methods…
Number one: director’s loan
A director’s loan is very flexible and by far the most common approach. It is where the directors of the SPV have the deposit cash sitting in their savings account and will simply put that cash into the company as a loan.
So, once you have created a new SPV with the correct SIC code, you transfer the deposit money from your bank account into the SPV. The deposit is then sat legitimately inside, ready to be used.
Number two: shareholder’s funds
It is rare that people choose this option, but it does happen. It is where you, as a shareholder, put an amount of money into the business, in return for your shares.
Number three: retained profits
If you have existing money in your SPV, this is known as retained profits, and you can use this money for your mortgage deposit.
Let’s say that you have two buy-to-let properties in your existing limited company, that have been generating profits for a few years. Therefore, there’s already £100,000, for example, sat inside the SPV from retained profits – you can use this money for your mortgage deposit.
If the amount of money isn’t enough you have two choices: you could either put in more money as a director’s loan or put in more money by way of shares.
Can you loan the money?
Some people want to use more elaborate schemes to get their mortgage deposit. A common question we hear is, ‘Can I loan the money from my trading company?’
For example, you have an IT contractor who owns his own trading company, IT Contracting Ltd, which is a day rate business. He wants to loan money from IT Contracting Ltd into the SPV.
Generally, this won’t be accepted by lenders because it is technically a loan, meaning there is a debt involved and the lenders see too much risk. Even if that loan is written off, many lenders will shy away from the transaction.
Lending to a limited company
When it comes to lending to a limited company, you will find that mortgage lenders have different criteria. There will be those who accept more complex situations, as well as those who only accept the simplest, whiter-than-white applications.
One lender might only accept mortgage applications from limited companies where everything is mirrored, with personal names and no layering. Then you’ve got the lenders who’ll consider a little bit of layering or an inter-company loan that has been written off. These cases are far more complicated with more hoops to jump through, and as a result, your mortgage rates tend not to be as good.
Here at HCM we can offer guidance for your personal circumstances. We’ve dealt with more complicated mortgages which have involved layering and inter-company loans and are therefore in a great position to advise you!
If you’ve decided to purchase a holiday let through a limited company, here’s what you need to do:
Make sure that you’ve got a limited company with the correct SIC code. Or, if you’re dealing with an existing limited company, make sure that it was correctly incorporated as an SPV with the correct SIC code in the beginning.
Plus, check that it has never traded and has no trading history, other than owning property. And don’t forget that the shareholders and directors normally have to mirror the applicants for the mortgage.
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The information contained in this article is accurate at the time of writing, based on our research. Rules, criteria and regulations change all the time and so please speak to one of our Consultants to confirm the most accurate up to date information. Nothing in this article constitutes financial advice. Please always consult your accountant or solicitor for all financial, taxation or legal matters. Your home may be repossessed if you do not keep up repayments on your mortgage. Pure holiday let, buy to let and commercial mortgages are not regulated by the FCA.