Limited SPVs, LLPs & trading Ltd company property purchase

Whether you’re looking to buy an office, shop or a warehouse - or property used as an investment - choosing the right commercial property is critical to the success of your business.

There are certainly a number of advantages to owning your business property. If you own the premises you work from then you have greater freedom to use it in the way best suited to your business function and employees. This means you can decorate, make repairs and redesign as you wish, unlike in a rented property, which is likely to be quite restricted.

You may also want to buy premises as an investment. Residential or commercial property can offer a steady income and the possibility of capital growth.

But there are several business structures that could help reduce the tax burden. SPVs, LLPs & trading Ltd companies are all used to buy property. 

Buying with an SPV

An SPV - or Special Purpose Vehicle limited company -  can be set up by an individual or partnership, or can be a subsidiary created by a parent company. Its purpose is to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt - but for property investors, its main attraction is greater tax efficiency.

For buy-to-let investors, SPVs only hold the property as an asset and let the owners ring-fence the income and expenditure of their buy-to-let activities. Many landlords are now purchasing rental property via an SPV limited company.

Setting up an SPV

Many more landlords are now purchasing rental property via an SPV limited company. It may be more tax-efficient now that the changes to tax relief on finance costs for individual landlords have been phased in.

An SPV is a full legal entity, but it can be set up easily online in a few minutes. It simply requires a relevant SIC code. The Standard Industrial Classification of Economic Activities (SIC) is used to classify businesses by the type of work they do. Most investors require a SIC code from Section L: Real estate activities.

They are very easy to set up. You can either ask your accountant or simply go to the Companies House website and set the company up yourself. An SPV limited company costs £12 to set up, and if done online, it will take just a few minutes to arrange. As long as you intend to use the company just for property letting going forward, it would automatically be classed as an SPV. 

However, if the company has previously traded in another field in the past, it could complicate the lender's view of the business. Some lenders will still lend to the company as long as this is historic, the company has the right SIC code and the accountant can confirm the company will only be letting property in future.

If there is any doubt it may be simpler to set up a new company. 

Buying property with an SPV

Buy to let lenders offering mortgages to corporate vehicles may prefer SPVs to trading limited companies because they are easier and quicker to understand and underwrite, and are perceived as being lower risk. This is especially true where investors have created an SPV (Special Purpose Vehicle) such as a registered business solely created for property investment.

Buying with an LLP

An LLP - or Limited Liability Partnership is another type of business structure. Any partnership is simply a business set up by two or more people, but these days there is more than one kind of partnership. A Limited Liability Partnership (LLP) is an alternative legal structure that was introduced in 2001 by the LLP Act 2000 and, today, businesses can operate as a traditional partnership or as an LLP. The main difference between a traditional and limited liability partnership is the level of financial responsibility of the partners.

• Traditional partnerships place the full burden of business debts upon the partners
• An LLP limits this liability

This is because an LLP works as a normal partnership structure in terms of tax liability, internal management and the distribution of profits, but it ensures reduced financial liability, or ‘limited liability', to each partner. The introduction of LLPs has enabled certain professions that in the past have operated as a traditional partnership to benefit from the reduced financial risk of a limited company while enjoying the flexibility of a partnership in terms of taxation, profit distribution and the rights and duties of partners. It is often seen as the ideal structure for the professions that normally operate as a traditional partnership, such as solicitors, accountancy firms and dental practices.

While traditional partnerships have unlimited liability, making partners responsible for all debts incurred by the business, the liability of an LLP and its members is limited to what the partners invest and any personal guarantees put in place. Beyond this, members’ assets and finances are protected.

LLPs and property

An LLP can own property, as can most other kinds of business. So for example a dental practice owned by the dentists who work in it could arrange to buy their surgery premises.  In most cases, this will require external funding, in the form of a commercial mortgage to finance the purchase. 

However, getting a mortgage through an LLP provides some challenges. A mortgage through an LLP is of course classed as a self-employed mortgage. Certain lenders may advertise slightly higher rates for mortgages involving limited companies or limited liability partnerships. Each lender has different variables in how they’ll calculate maximum mortgage amounts for LLPs. The majority of lenders generally lend between three times an annual income and five times your annual income as a maximum.

Lenders will also need to check the affordability of the borrower, which is standard practice for any mortgage application. As self-employed applicants won’t have payslips and a set annual income, lenders have to distinguish the income in a completely different manner. 

For instance, an LLP mortgage will be assessed on the business income, in the form of finalised accounts or SA302 documents. Lenders will only accept official documents that are either signed off by an accountant or official documents from the HMRC.

The majority of lenders will only lend to Limited Liability Partnerships that have been trading for at least three years. Having accounted for three years can show lenders how stable the LLP is, along with the income generated over this time period. Lenders can then make a judgement of whether or not the mortgage will be affordable. For instance, if an LLP was established only six months ago, it gives lenders little proof of how financially capable the business will prove to be.

Most lenders will request accounts for three years. There are specialist lenders that may offer mortgages on accounts with less history, and even if an LLP has only just filed their first year’s accounts, there may be specialist lenders willing to lend. 

Trading companies and property purchase

While LLPs and SPVs may provide some special opportunities for property purchase and under certain circumstances may reduce costs of finance overall, it is still perfectly possible to buy a property through a trading company - that is, one which has its main business activities in another area, and which is actively trading.

This will be the usual practice if your business wishes to buy the premises it works from. Acquiring a workshop, office, shop or factory can be done with a commercial mortgage, which may run for anything from 5 to 20 years, and even longer in some cases.

Your business will be responsible for the repayment of the loan and, as with a residential mortgage, the premises will be at risk if you are unable to keep up your repayments.

Unlike a residential mortgage, however, the rates for a commercial mortgage are arranged on an individual basis. Lenders will look at your business, your accounts and projections to ensure that it has a future and set interest rates based on the level of risk they believe it presents.

This can be the key issues when buying property through a trading company. It is the performance of your company that will be key in the lenders' assessment of the risk a loan would present - and the level of interest they would charge. This could mean that if you have had a bad trading year, it will cost more to buy your premises than it would in a good year.

It may be possible to set up an SPV to help overcome this problem.

What will it all cost?

Getting a commercial mortgage may actually be easier in comparison to a residential mortgage using our knowledge of the lending market, and approaching lenders who specialise in buy to let mortgages solely for companies. Rates do tend to be slightly higher than homeowners rates, though, due to the increased risk due to the limited liability of the business. 

With some type of business, if the mortgage fell into arrears, the individuals in the business wouldn’t be liable for any company debt -  lenders may include clauses in their mortgage terms to hold directors of the LLP accountable in cases where loans aren’t repaid.

The deposit required is usually higher for a buy to let mortgage in comparison to a residential mortgage. This is irrespective of whether or not the applicant is an LLP, and SPV or trading business. Most lenders insist borrowers have a 25% deposit. Headline rates tend to start at 60% loan to value. Despite this, there are still lenders that may offer buy to let mortgages with deposits of just 15%.

There will be valuation, arrangement and legal fees to consider. There can also be additional costs associated with a Commercial Mortgage for the services of professional advisors.

How much can you borrow?

Because of the legal and administrative costs, it is uneconomical to borrow less than £50,000 with a Commercial Mortgage, and some lenders have a minimum of £75,000 or more, but there is no set upper limit.

Typical loan-to-value ratios for a new business with no trading history will be a maximum of 50% of the purchase price. Owner-occupied businesses such as offices or shops can normally get a maximum loan-to-value of around 80%.

You may also be able to choose a repayment mortgage option where you pay the capital and interest back each month or an interest-only mortgage, where you only pay the interest back each month. If you choose this option, the lender will seek evidence of an appropriate investment policy that will cover the outstanding capital at the end of the loan term.

By coming to Rangewell, you can be sure of having an expert team working for you to ensure that you can have the most competitive funding from the entire lending market. 

Getting the buy to let mortgage you need for your type of business structure

Buying commercial property or residential property on a commercial basis can be more complicated. For example, capital gains tax may be significant when a property is sold – so it’s important to speak to a chartered accountant or specialist tax adviser about your longer-term plans for your property portfolio.

You need to decide on the business structure that is right for your needs. As business funding experts, we work with all types of property finance - including commercial mortgages. This can help us find the most appropriate lending for your particular type of business and your business structure. 

This means that, by coming to us, you can have expert support through any complications which should leave you with the funding you need at a lower cost than if you tried to secure it yourself.

Rates are crucial. Even a fraction of a percentage point can make a substantial difference to what you will actually repay each month, and understanding fees and penalty charges are also vital to extra cost. 

Borrowing can be made more challenging still by the fact that there are many different lenders who may be prepared to offer funding. Each has their own approach to interest rates and fee arrangements, and comparing them all may require expert knowledge to fully understand what is really being offered.

At Rangewell, we work with lenders across the market - and we can call on the expert knowledge you need. It means that you have the financial solutions you require when you are considering a business property purchase. Our knowledge can not only help you secure the funding you need - it can make your property plans more affordable

ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.