Buying a Buy To Let through a Limited Company (SPV)

An SPV, or Special Purpose Vehicle, is a type of limited company created specifically for the purpose of buying, owning, and managing buy-to-let (BTL) properties in the UK. Using an SPV for BTL mortgages can offer several benefits, particularly in terms of tax efficiency and financial management.

Key Benefits of Using an SPV for BTL Mortgages:

1. Tax Efficiency:
• Mortgage Interest Relief:
• Individual landlords can no longer fully deduct mortgage interest from rental income for tax purposes, but SPVs can still deduct mortgage interest as a business expense. This can significantly reduce taxable profits.
• Corporation Tax Rates:
• Rental income within an SPV is subject to corporation tax, which is generally lower than the higher rates of income tax that individual landlords might face.
• Dividend Tax Allowance:
• Profits can be distributed as dividends, which may be more tax-efficient than receiving rental income directly, especially if the shareholders are within their dividend tax allowance.
2. Limited Liability:
• The SPV structure provides limited liability protection. This means personal assets are protected if the SPV faces financial difficulties or legal issues.
3. Professional Management:
• Operating through an SPV can make it easier to manage multiple properties and streamline business operations. It can also be more attractive to lenders and investors due to the professional setup.
4. Inheritance Planning:
• Shares in the SPV can be more easily transferred to family members as part of inheritance planning, potentially benefiting from business property relief.
5. Access to Financing:
• Some lenders prefer or only offer certain mortgage products to SPVs. This can provide access to a wider range of financing options and potentially better mortgage rates.
6. Clear Separation of Finances:
• Keeping personal and property finances separate can simplify accounting and financial management, making it easier to track the performance of your property investments.

Considerations:

1. Set-Up and Running Costs:
• Establishing and maintaining an SPV involves additional costs, including incorporation fees, annual filings, and accounting services.
2. Complexity:
• Managing an SPV requires a higher level of administrative effort and compliance with company law and tax regulations.
3. Dividend Tax:
• While dividends can be tax-efficient, they are still subject to dividend tax rates, which may reduce the overall tax advantage.
4. Lending Criteria:
• Some lenders may have stricter criteria for SPVs, including higher interest rates or larger deposit requirements compared to individual BTL mortgages.

Please Note: This is for information purposes only; you should discuss the option of either buying a BTL in your personal name or an SPV with an accountant.

What is a discounted Rate?

 

A discounted mortgage is a type of variable rate mortgage where the interest rate you pay is set at a discount below the lender’s standard variable rate (SVR) for a specified initial period. After this period, the rate typically reverts to the lender’s SVR. The discounted rate can offer lower monthly payments compared to other mortgage types during the discount period.

Key Features of a Discounted Mortgage:

1. Discounted Rate:
• The mortgage interest rate is reduced by a certain percentage below the lender’s SVR for an introductory period, usually between 2 and 5 years. For example, if the SVR is 4% and the discount is 1%, you would pay an interest rate of 3% during the discount period.
2. Variable Payments:
• Since the SVR can change, your monthly payments can vary during the discount period. If the SVR goes up or down, so will your payments.
3. Initial Period:
• After the discount period ends, the interest rate usually reverts to the lender’s SVR, which can result in higher monthly payments.
4. Early Repayment Charges (ERCs):
• Many discounted mortgages come with ERCs if you repay the mortgage or switch deals during the discount period.
5. Flexibility:
• Some discounted mortgages offer more flexibility, but this can vary by lender and specific mortgage product.

Advantages:

• Lower Initial Payments:
• The discounted rate can provide lower monthly payments during the introductory period, making it easier to manage finances.
• Potential for Savings:
• If the lender’s SVR remains low, you could benefit from lower payments for the duration of the discount period.

Disadvantages:

• Variable Payments:
• Payments can increase if the lender’s SVR rises, making budgeting more challenging.
• End of Discount Period:
• After the discount period ends, the rate reverts to the SVR, which could be significantly higher, leading to higher payments.
• Early Repayment Penalties:
• If you want to repay the mortgage early or switch to a different mortgage during the discount period, you might incur ERCs.

Considerations:

• SVR Fluctuations:
• Understand how often and by how much the lender’s SVR has changed historically, as this will impact your payments.
• Future Financial Planning:
• Plan for the end of the discount period and consider whether you might want to remortgage to a different deal at that time.

 

• Comparison:
• Compare discounted mortgages with other mortgage types (like fixed or tracker mortgages) to see which offers the best overall deal based on your financial situation and risk tolerance.

What is a Tracker Rate Mortgage?

A tracker rate mortgage is a type of variable rate mortgage where the interest rate is linked to the Bank of England’s base rate (or another specified rate), plus a set percentage. Unlike fixed rate mortgages, the interest rate on a tracker mortgage can go up or down, which means your monthly payments can change throughout the term of the mortgage.

Key Features of a Tracker Rate Mortgage:

1. Linked to Base Rate:
• The interest rate is typically described as "Base Rate + X%". For example, if the base rate is 0.5% and your tracker mortgage is set at Base Rate + 1%, your interest rate would be 1.5%.
2. Variable Payments:
• Your monthly payments will fluctuate in line with changes in the base rate. If the base rate goes up, your payments increase; if it goes down, your payments decrease.
3. Initial Period:
• Tracker mortgages often come with an initial period, such as 2, 3, or 5 years, after which the rate may switch to the lender’s standard variable rate (SVR).
4. No Early Repayment Charges (ERCs):
• Some tracker mortgages have no ERCs, offering more flexibility if you want to repay the mortgage early or switch deals.

Advantages:

• Potential for Lower Payments:
• If the base rate decreases, your mortgage payments will reduce accordingly.
• Transparency:
• The rate changes are straightforward and directly linked to the base rate, making it easy to understand how your payments are calculated.
• Flexibility:
• Often more flexible with fewer penalties for early repayment compared to fixed rate mortgages.

Disadvantages:

• Uncertainty:
• Payments can increase if the base rate rises, making budgeting more challenging.
• Higher Risk:
• There's a risk that your payments could become unaffordable if the base rate rises significantly.

What is a fixed rate mortgage?

 A fixed rate mortgage is a type of home loan where the interest rate remains constant for a specified period. This period is typically between 2 and 10 years, although longer terms may be available. During this fixed term, your monthly mortgage payments will not change, regardless of fluctuations in the Bank of England base rate or the broader financial market. 

Key Features of a Fixed Rate Mortgage: 

1. Stability: 

• Your monthly payments stay the same for the duration of the fixed period, making budgeting easier and providing financial predictability. 

2. Fixed Period: 

• Common fixed periods include 2, 3, 5, and 10 years. After the fixed period ends, the mortgage usually reverts to the lender’s standard variable rate (SVR), which can change over time. 

3. Interest Rates: 

• Fixed rate mortgages often have slightly higher initial interest rates compared to variable rate mortgages; due to the added security they provide against rate increases. 

4. Early Repayment Charges (ERCs): 

• Many fixed rate mortgages come with early repayment charges if you pay off the mortgage or overpay beyond a certain limit during the fixed period. 

5. Lender Flexibility: 

• Different lenders offer various fixed rate deals, so it’s important to compare offers to find the best terms and interest rates for your situation. 

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Advantages: 

• Predictable Payments: 

• You know exactly how much you’ll need to pay each month, which helps with financial planning. 

• Protection Against Rate Rises: 

• If interest rates rise, your payments won’t be affected during the fixed period. 

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Disadvantages: 

• Higher Initial Rates: 

• Fixed rate mortgages can have higher interest rates compared to variable rate options at the outset. 

• Lack of Flexibility: 

• If interest rates fall, you won’t benefit from lower rates during the fixed term. 

• Early Repayment Penalties: 

• If you need to repay your mortgage early, you may incur significant charges.