The rental landscape for landlords in the UK is now changing due to two factors:
- Introduction by the Prudential Regulation Authority (PRA) on the 01/01/2017 of increased rental coverage requirements on personal Buy to Let mortgages.
- The reduction of tax relief on interest payments on personal buy to let mortgages. from April 2017.
Increased Rental Coverage Requirements on Personal Buy to Let
In this section, I will cover the effect of the increased rental coverage requirements and how purchasing via a Limited Company / SPV maybe the answer.
From the 01/01/2017 the PRA rental requirements on personal Buy To Lets are:
- 145% cover at a nominal interest rate of 5.00% (for 5 year fixed rates)
- 145% cover at a nominal interest rate of 5.50% (all other products/rates)
I have shown below the rent now required based on borrowing £200,000 mortgage after funding a 25% deposit.
| Borrowing | Nominal Rate | Coverage | Rent required |
|---|---|---|---|
| £200,000 | 5.50% | 145% | £1329.16 (all other products/rates) |
| £200,000 | 5.00% | 145% | £1208.33 (five year fixed rate) |
The effect of this is that many buy to let properties cannot be purchased as the rental income generated will not be high enough to match the new criteria.
A possible way forward is to purchase your buy to let property via a Limited Company or Special Purpose Vehicle (SPV).
Rental Coverage Requirements on Limited Company Buy to Lets
For buy to lets now purchased in your in Ltd Co / SPV, the lenders now require rental coverage of :
- 125% at a nominal interest rate of 3.85% (Two years fixed).
- 125% at a nominal interest rate of 3.49% (Five years fixed).
I have shown below the rent required based on borrowing £200,000 mortgage after funding a 25% deposit.
| Borrowing | Nominal Rate | Coverage | Rent required |
|---|---|---|---|
| £200,000 | 3.89% | 125% | £802.08 (two year fixed rate) |
| £200,000 | 3.49% | 125% | £727.08 (five year fixed rate) |
Buying via a Limited Company / SPV gives the ability to purchase buy to let properties with lower rental yields.
You can find further information on how form a SPV / Limited company here and additional information on purchasing via SPV / Ltd Co here.
Taxation on Personal Buy to Let compared to Limited Company Buy to Let
Currently, personal landlords paying higher rate tax can claim tax relief at their highest tax rate. The effect on the new taxation is that tax relief can only be reclaimed at the current basic rate of 20% whatever tax rate you pay as a landlord. The tax rules are being phased in over 4 years starting in April 2017.
The effect of this is that if you are currently paying UK tax or will in the future, your tax bill will automatically increase.
Limited Company and SPV offer three tax incentives:
- Limited Companies are not affected by the new mortgage interest relief restrictions starting in April 2017. Interest payments for limited companies is classed as a business expense and fully deductable against income
- The profit made by the Limited Company is liable to Corporation tax at 20%. Reducing to 17% in 2020.
- From April 2017 each director /shareholder has a tax free £5000 dividend income allowance.
Lenders
For Ex-Pat landlord clients buying on a personal basis we have access to 13 lenders and less onerous lending requirements.
Buying via a Limited Company / SPV is far more restricted. In time the choice of lenders should increase as there is little difference in risk as you give a personal guarantee to the Limited Company.
Limited Company/SPV applications are acceptable where you can evidence:
- a credit footprint in the UK
- pays UK tax or has declared income of UK tax purposes
- at least one buy-to-let property in the UK
- is employed by a multi-national employer or Sovereign entity
- has written confirmation from their employer of their residential address in the foreign country and period or residency
- UK bank account
- UK correspondence address
- provide the last 2 years SA100 and tax calculations
- Please contact us for latest criteria
Solicitor and Accountant Advice
As this lending is more specialist we recommend you speak to a solicitor and accountant before proceeding. If you do not have your own solicitor or account or feel that they do not have the specialist knowledge, we can recommend one for you. They will happily discuss over the phone your options and the implications of buying via an SPV / Ltd Co.
Why Use Neil Soundy Financial Services For Your Mortgage Advice?
- We are experts in SPV / Ltd Co lending.
- Your initial consultation is free with no obligation
How Much Will It Cost Me For Your Advice?
A fee of £495 is payable on completion of the mortgage and Neil Soundy Financial Services Ltd will keep the commission received from the lender for arranging the mortgage.
Neil Soundy Financial Services Ltd is an appointed representative of HL Partnership Ltd which is authorised and regulated by the Financial Services Authority.
The Financial Conduct Authority does not regulate some forms of buy-to-lets.
We do not give or imply legal or taxation advice. We recommend you contact a solicitor or accountant for advice in these areas.
Think carefully before securing other debts against your home/property. Your home/property may be repossessed if you do not keep up repayments on your mortgage.
