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What is a buy-to-let company?

A buy-to-let company is a limited company that owns and rents out property to earn rental income for its investors. The property is purchased through a mortgage and the rentals are used to pay off the mortgage debt.

Investing in a buy-to-let property can be a lucrative venture, but setting up a limited company in the right way to be able to secure the needed financing requires careful consideration. In this guide, we’ll explore the key considerations you should bear in mind when setting up a buy-to-let limited company.

Key considerations in setting up a buy-to-let company

Deciding on the company type

Once you have decided to form a limited company for your buy-to-let business, you have two options regarding forming a limited company. The first option is to form a trading company and the second option is to incorporate a special purpose vehicle “SPV”.

An SPV is a limited company specifically incorporated to buy, hold, and rent the property and therefore it has no other commercial objectives.

Usually, the lenders are more inclined to offer mortgage finance to an SPV than a normal trading company because the cash flows of an SPV are directly linked or traced to the assets/property of the SPV which makes it easy for them to assess their creditworthiness. On the other hand, cash flows of a trading company can arise from many sources which makes it difficult for lenders to review and assess their feasibility for mortgage finance.

Irrespective of the decision about the type of limited company, the first step in setting up a buy-to-let company is to register your company with Companies House. You can do this online or with the help of an accountant. During the registration process, you will need to provide details such as the company name, registered address, and the names of the directors and shareholders.

You will need to provide a registered office address when registering your company with Companies House. This is the official address of the company and will be used for all correspondence from Companies House and HMRC. It does not have to be the same address as the property you are renting out. The company-registered address needs to be a physical address.

It is advisable not to use your home address from a privacy point of view and avoid receiving junk mail. Many service providers can offer you the service of a registered office address.

In addition to excellent accounting and taxation services, fusion accountants provide their clients the services of a registered office address at very concessional rates.

You will need to select a SIC (Standard Industrial Classification) code when registering your company with Companies House. The SIC code should reflect the nature of your business, in this case, buy-to-let property investment. The SIC code for buy-to-let property investment is likely to be 68209. It is important to select the correct classification as the lenders check this and want to see that the company’s main purpose is to hold the property.

If you want to know more about the process of setting up a limited company, please read our guide by clicking here

Memorandum and articles of association

You will also need to prepare a memorandum and articles of association. The memorandum outlines the company’s objectives and powers, while the articles outline the rules under which the company will operate. You need to ensure they are tailored to your specific needs i.e. buy-to-let.

Shareholders and directors

Limited companies must have at least one director and one shareholder. The director is responsible for managing the company, while the shareholder owns the company’s shares. In a buy-to-let company, you may have several shareholders and directors. You should consider the roles and responsibilities of each person and ensure that they are documented clearly. If you are going to be the director/shareholder of your buy-to-let limited company, you will need to be aware of the different legal responsibilities.

If you want to know about the director’s responsibilities, please read our guide by clicking here

At Fusion Accountants, we help directors like you in taking care of their legal responsibilities so that they can focus on just developing and growing their businesses.

Share capital

When setting up a buy-to-let company, you will need to decide on the amount of share capital you will issue. Share capital is the amount of money that shareholders invest in the company in exchange for shares. This can be a nominal amount, such as £1, or a larger amount, depending on the company’s needs. It is very important to decide on the share structure when forming a limited company. Shares can be ordinary, alphabet, preference, etc.

It is advisable to select a simple share structure. Lenders will more likely approve the application of a company with a simple capital structure than a company with a complex capital structure.

Bank account

Once your company is registered, you will need to open a separate bank account for the company. This will ensure that the company’s finances are kept separate from your finances. Further, the lenders will likely reject your financing application if the account is in your name.

Owner Loan Agreement

If you are lending money to the company for the initial deposit and other legal expenses in connection with the financing of the property, you will need to create an owner loan agreement. This agreement sets out the terms of the loan to the company, including the interest rate, repayment schedule, and any security provided. If you are the director/shareholder of the company, this will be called a director loan account. It is advisable to keep the loan as interest-free. Keeping the loan interest-free will increase the value of company shares and in the case of disposal will result in capital gains tax which is lower than income tax. The company can start repaying your loan once it starts receiving rental income. The extraction of cash from the company in the form of debt repayment will be tax-free for you.

It is important to have a written agreement to avoid any confusion or disputes in the future. The existence of a written loan agreement is viewed as favorable by lenders as it makes the process of due diligence easier. The owner loan agreement should cover the following.

Purpose and amount of the loan: The loan agreement should clearly state the purpose of the loan and the amount being borrowed.

Interest rate: The interest rate should be clearly stated in the agreement, and it should be reasonable for both the lender and the borrower.

Repayment schedule: The repayment schedule should be clear and agreed upon by both parties. It should consider the expected cash flow from the rental property and any other sources of income.

Security: The loan agreement should specify what security is being provided for the loan, such as a charge on the rental property or a personal guarantee from the borrower.

Shareholders agreement

A shareholder agreement is a legal document that sets out the rights and obligations of the shareholders. It covers issues such as share transfers, dividend payments, and voting rights. It is important to have a written shareholder agreement to avoid disputes and ensure that everyone understands their rights and obligations. A shareholder agreement should cover the following.

Share ownership and rights: The shareholders’ agreement should outline each shareholder’s share ownership and voting rights. It should also specify how dividends will be paid and how the company will be managed.

Share transfers: The agreement should specify the rules around transferring shares, such as the pre-emption rights of existing shareholders and any restrictions on who can own shares.

Decision-making: The agreement should outline the decision-making process for the company, including how important decisions will be made and how disputes will be resolved.

Exit strategy: The agreement should include an exit strategy for shareholders who wish to sell their shares, including any rights of first refusal or drag-along rights.

Conclusion

In conclusion, setting up a buy-to-let company requires careful consideration of the legal and financial requirements. By following these key steps, you can ensure that your buy-to-let company is set up correctly.

If you are looking to invest in a buy-to-let company and need help, let Fusion Accountants be your working partner to look after your best interests. Get in touch.