Mortgage Guide for Company Directors

If you are a company director, you have probably encountered some problems when applying for a mortgage. Most of the time this is around income requirements, but there are also other pitfalls a company director can fall into when applying for a mortgage.

The great news is there are now a full range of options for company directors who want to obtain a mortgage. This guide explores company Buy to Let mortgages and company director residential mortgages.

Let’s start with Buy to Let mortgages for companies.

Buy to Let Mortgages for Limited Company Directors

The landlord market has become unfavourable for private Buy to Let landlords due to government restrictions and taxation.

This increased pressure on private Buy to Let landlords has driven many to either sell their properties or arrange their property portfolio in a more efficient way – specifically under the umbrella of a Limited Company (LTD).

There are three areas to be aware of up front if you are looking to get a Limited Company Buy to Let mortgage:

• Limited Company mortgages are unregulated in the UK. The FCA does not provide the standard consumer protections for these products.
• The products differ from standard Buy to Let mortgages with different requirements and often different interest rates.
• You may be required to provide a Director’s Guarantee on your mortgage.
  

Now we have the complexities of a Limited Company Mortgage out of the way, let’s look at the benefits of taking a Buy to Let as a Limited Company.

With a Limited Company mortgage, you can:

• Obtain company finance above the £25,000 threshold on most commercial loans.
• Buy property and rent it out for increased company revenue.

Key Advantages of a Company Buy to Let

There are two main advantages if you take a Company Buy to Let:

• It has benefits around taxation.
• Purchasing property under a Limited Company has flexibility that you do not get with a standard Buy to Let Mortgage.

Taxation on Company Buy to Let Mortgages

As with any company finance, the interest you get charged on a Company Buy to Let is tax deductible. Under the current tax regime, you can offset the interest payments against your annual tax bill.

When managing the property and ongoing upkeep you will undoubtedly have outgoings around maintenance. Some of these expenses may be tax deductible, which can reduce the financial burden compared to a standard Buy to Let mortgage.
There may also be other tax advantages, such as benefits around assets and writing off losses.

Because tax and company owned property is nuanced, you may find some benefits are not applicable to your company. Your accountant will give you a complete picture of whether purchasing property through your company is in your best interests.

Flexibility of a Company Buy to Let

When you own a property personally, there are restrictions around what you can and can’t do with that property. For example, when transferring deeds into another name you may encounter a Stamp Duty liability.

When you own property under a Limited Company, you can simply appoint directors if you want someone to benefit from the ownership of the property.

Director’s Guarantees

In some instances, the flexibility of owning a property under a company will be reduced or non-existent because of a Director’s Guarantee.

A Director’s Guarantee is an agreement drawn up between a director and a lender that permits the lender to hold a director personally liable for the debt in the event of a company default.

Most company debt is limited by shares held in the company. For example, if your company has one hundred ordinary shares at a value of £1, the total liability a company can be legally held liable for is £100.

Of course, when buying property, a typical company shareholding liability isn’t enough to cover the cost of a mortgage payment let alone an entire mortgage.

In these cases, it is common for a lender to request a Director’s Guarantee. If this is requested, you will only be able to secure the finance by agreeing to the terms of the guarantee.

Most Director’s Guarantees require a director to put personal assets down as collateral such as a private residential property. In most cases the lender will then apply to put a charge on your personal property.

This is important as you may have difficulty remortgaging your personal property if there are multiple charges on it.

Transferring Property Owned by a Limited Company

If you are looking to keep property in the family, owning it through a family business can have advantages when transferring it.

With property owned in a standard way, when you pass away the property will go into your estate and then be subject to inheritance tax if it is over the tax threshold. This tax will then need to be paid from the estate before you can transfer property to your children.

With a limited company, you would be able to transfer the property by transferring ownership of the company.

There are three taxes that can apply when transferring property:

• Inheritance Tax (IHT)
• Stamp Duty (SDLT)
• Capital Gains Tax (CGT)

While you might not be able to negate tax altogether by using a Limited Company, you should find transferring a property owned by a Limited Company is more tax efficient than standard property ownership.

Once again, your accountant will be able to guide you with transferring property and taxation and advise you specific to your situation.

How to Set Up a Special Purpose Vehicle

Obtaining a Company Buy to Let can be done in one of two ways:

• Directly through your Limited Company.
• Using a Special Purpose Vehicle.

What is a Special Purpose Vehicle (SPV)?

A SPV can be set up to hold assets such as property or vehicles and is becoming increasingly popular with Buy to Let landlords who already have Limited Companies.

A SPV has its own set of accounts and can be set up under a Limited Company, a Limited Liability Partnership and other business types such as trusts etc. To set up a SPV you should talk to your accountant and discuss whether this type of legal entity is a good option for your business.

It is worth noting that currently SPVs are under scrutiny by HMRC and there may be tax changes on the horizon which could negate any benefit to having one. Because of their tax benefits, the public also have a negative perception of companies using SPVs and if your core business is outside of Property Investment, it could impact the reputation of your core brand.

Mortgage Criteria for Limited Companies

If you are applying for a mortgage directly through your company, you may find it much easier than using a SPV.

This is because your company will have a set of accounts with revenue and profit to show a lender. Most SPVs are set up expressly for holding property and lenders might find it too risky to lend to a SPV, especially if the accounting history is scarce or non-existent.

However, Buy to Let Limited Company mortgage lenders will only lend if the company has acceptable SIC Codes – which normally must be associated with property. Boon Brokers can inform you of which SIC Codes will be required for your limited company mortgage application.

A mortgage lender will want to see evidence that your company can repay the interest on a Company Buy to Let mortgage and will ask for evidence such as company accounts and in some cases, additional information from your accountant.

If the company is limited to a low value shareholding, it is almost certain that a Lender will decline the mortgage or request a Director’s Guarantee. Even with an impressive set of accounts, having such limited liability held by your company is going to be a significant risk for a lender.

Stamp Duty for Limited Companies

When purchasing a property, a Limited Company has an additional tax burden. Stamp Duty is charged on any residential property with a value above £40,000. The rate of Stamp Duty for limited companies is much higher than the standard Stamp Duty rate.

For commercial premises or property such as warehouses and offices, the Stamp Duty rate is different (and much more competitive).

All residential company Buy to Lets will incur the Stamp Duty rates in the table above.

Residential Mortgages for Limited Company Directors

If you are looking to buy a residential property rather than a Buy to Let as company, you will find that your options are non-existent.

Lenders will not allow a company to purchase a property for a company director to live in. Instead, you should look at a standard mortgage product. The great news is most company directors have options that a standard borrower doesn’t have when applying for a traditional mortgage product. Especially around demonstrating income.

Lenders have different criteria for company directors but there are lenders who will accept your income as:

• Salary
• A combination of salary and dividends
• Using your company accounts

Typically, you will need to produce at least 2 years’ worth of personal Tax Calculations & Tax Year Overviews and/or company accounts. There are lenders who will request more information and ask to see records going further back.

If you are a new company director or have recently become self employed there are lenders who will look at your latest year’s Tax Calculations & Tax Year overviews and/or 1 year’s accounts. There are even lenders who will consider 1 year’s company accounts.

You may also need an accountants’ letter to show a lender your income is expected to remain consistent in the future. There may be some lenders who can accept just an accountant’s certificate as proof of income, with no other evidence required.

Lastly, a mortgage lender may ask for a wider picture of your finances such as whether you expect your business to grow.

Residential Mortgages for a Director of a Limited Liability Partnership (LLP)

Applying for a mortgage as a director of a LLP is slightly different to applying for a mortgage as a director of a limited company. This is because the way you earn income is slightly different.

Most directors of LLPs will take their income on a self-employed basis. As a result, a lender will ask for just your personal Tax Calculations & Tax Year Overviews. This differs to a limited company owner, where company accounts may be requested too.

They may also ask for information about the LLP because as a director you will be personally liable for debt held within this type of company. The amount of personal liability you have in an LLP could impact the amount of money a lender will offer for your mortgage. You should discuss the details of your LLP with a whole of market mortgage broker, like Boon Brokers, and they will advise you on the best options available.

What Do I Need to Provide for a Residential Mortgage?

To summarise, you will not be able to borrow money through a company for a residential mortgage (to buy a property for a director to reside in). When applying for a mortgage as a director, you will be asked to provide details of your income. The way that you demonstrate your income differs between lenders.

Some request salary and dividend income only where others allow for use of company accounts. If you prefer to keep money in the company rather than draw down on dividends, the lenders that accept company accounts can be a godsend.

You may also need to provide future projections through a director’s statement or more commonly have your accountant provide a letter to the lender confirming you have the financial standing to repay the mortgage. These letters are additional to your income requirements – most lenders will not accept just an accountant’s letter as evidence of your income. You can’t self-certify income for a mortgage in the UK anymore.

Free Mortgage Advice for Company Directors

Boon Brokers provides fee-free, no obligation mortgage advice for company directors. Boon Brokers is a UK-based Whole of Market Mortgage, Insurance and Equity Release Broker.

Contact Boon Brokers today to discuss your goals and mortgage requirements today.