Setting up a limited company for buy to let: A step by step guide
Introduction. Investing in property using a limited company has become increasingly popular in recent times due to the introduction of Section 24 which now restricts the ability to deduct mortgage interest as an allowable expense. This article will take you through a simple step by step process to show you how to set up a limited company for buy to let.
Is a property limited company right for you? The first thing that you need to consider is whether a limited company structure for buy to let suits your situation. This will be different for each person, depending on their personal circumstances. I recently wrote a guide here which documents some of the advantages and disadvantages of limited company and personnel ownership for buy to let. It is also important to speak with an accountant who will be able to make recommendations based on your personal tax situation and what you are trying to achieve with property. Accufy Accounting are happy to help with this.
Choose a company name. One you have decided that setting up a company for buy to let is right for you, then it is time to think of a company name. The company name must follow a number of companies house guidelines which it is important to follow. Firstly it must be unique from other existing companies and not too similar. This can be quite frustrating, particularly if you had a name in mind and someone else is already using it. You can use the Companies House register to check for other companies that might have the same name. The property company should also not be a registered trademark. You can check for registered trademarks here. The name should be followed by either Limited or Ltd (or the welsh equivalent). A simple way to think of a name might be to base it on your surname although some would argue it is better to keep a measure of anonymity, the choice is yours. It might also be worth seeing if there is an available domain supposing you are thinking of creating a website.
Choosing Directors. You now need to decide who will be the directors of the property company. A company must have a minimum of one director. Directors of the property company must follow the companies rules, keep company records, report changes, file accounts and company tax returns and pay Corporation tax. Directors are able to get help for some of these tasks by employing people either directly or indirectly. There are rules on who can be a director. The company can also appoint a company secretary so assist with running the company, although this is not essential.
Shareholders. Property investing companies are usually guaranteed by shares. This means that they are owned by the shareholders who have certain rights. A company must have at least one shareholder and they may be required to vote on certain decisions needing to be made by directors. There is no limit on the number of shareholders, however it is important to check with your mortgage broker to see whether lenders have any restrictions on the number of directors and shareholders a company can have as it is likely to be no more than 4. A director can also be a shareholder as is often the case in smaller property investing companies.
You will need to decide which type of share and how many to issue to each shareholder. Property investing companies typically issue ordinary shares which entitle a shareholder to one vote and a right to receive dividends. Your accountant will be able to advise if it is appropriate to consider a different share structure, however in most cases it is best to keep things as simple as possible. When setting up the property investing company you will need to provide details of shareholders and their shares in what is known as a statement of capital.
People with Significant Control. You will also have to provide details of any People with Significant Control (PSC) for your buy to let company. This is usually someone who has share voting rights of more than 25%, more than 25% shares of the company and the right to appoint or remove the majority of board of directors. A PSC is often known as the company's beneficial owners. You will need to keep Companies House updated of your PSC’s each year when you submit your company's annual return.
Memorandum of Association and Articles of Association. When you set up a buy to let company you will need a memorandum of association, this is a legal statement signed by shareholders agreeing to form the company. If you set up the company online then this document will be created automatically. The buy to let company will also require articles of association. These are rules about how the company will be run and will be agreed by all shareholders and directors. For most property investing companies, it is suitable to opt to use model articles of association. These are a standardised set of rules which are set by Companies House although could potentially be customsied slightly by your accountant. Property companies with more complicated arrangements may require bespoke articles of association and should discuss this with their advisors before setting up the property company.
SIC Code. Your property investment company will require a Standard Industrial Classification (SIC) code. This is a code used by Companies House and HMRC to determine what economic activities the company is engaged in. There is a blog here which helps you decide which SIC code is appropriate for property companies. For those adopting a buy and hold strategy, 68209 - letting and operating of own or leased real estate if usually the most appropriate to use. Mortgage providers can be quite picky about which SIC code you use and so it is always worth having a discussion with your mortgage broker prior to committing. You are able to change your SIC code each year when you submit your annual return.
Register your company. Once you have decided on the above points it is time ro register your company. You can either do this through your accountant, who will be able to guide you through the process, or you can register yourself using the .gov website. There are also agents which provide company formation services. You will need to have information to hand on the points covered in this article above including details of all directors, shareholders and PCS’s to hand. You will have to pay a small fee (presently £12) if you register yourself using the .gov website. It is usually easiest to also register for Corporation Tax concurrently to this, however if you are unable to then you can also register for CT here. There is also an option to register by post using an IN01 form.
Conclusion. Setting up a limited company for buy to let is relatively straightforward so long as you are aware of all of the required information that you need to provide, which is listed in this article.
Accufy Accounting offer a value for money company formation service for customers. If you would like to talk through this with someone then please get in touch.
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