As buy-to-let limited companies become more common, increasing numbers of property investors are turning to company takeovers for rapid portfolio growth and stamp duty savings.
Rather than purchasing buy-to-lets as individual assets, experts say they have seen a gradual rise in investors entering into share purchase agreements to buy out 100pc of the shareholding from a landlord looking to quit the market quickly.
“The stamp duty relief alone when purchasing shares of a limited company compared with an outright property purchase is enough to shift the dial for buyers,” said James Donohue, of buy-to-let sales platform Landlord Property Exchange. “So, at a time when the buy-to-let market remains tough and people are looking for ways to ease the financial burden we expect to see more of this.”
However, these deals can come with tax and legal complications, and you could end up inheriting unknown obligations.
We’ve spoken to legal and property experts to find out how to spot a good deal.
Why are landlords turning to limited companies?
Using a limited company to purchase a buy-to-let became more tax-efficient for many property investors when mortgage interest rate relief was phased out for individual landlords between April 2017 and April 2020.
It was replaced with a 20pc tax credit, hitting many higher and additional-rate taxpayers’ profits hard.
The forthcoming four-percentage point rise in personal property income tax, and long-frozen personal allowance thresholds are also adding to individual landlords’ tax burdens.
Mortgage interest rate relief, the ability to deduct 100pc of your mortgage interest from your gross rent, has remained intact for those purchasing buy-to-lets through a limited company. Consequently, their appeal has rocketed.
By the end of August there were 469,165 buy-to-let businesses operating across Great Britain, according to estate agency Hamptons.
This explosion of limited-company buy-to-lets has given way to a new opportunity for investors – one which comes at a fraction of the stamp duty cost.
Benefits of share buyouts
Mr Donohue said he had seen the popularity of share purchases steadily grow over the past 18 months, with cheaper stamp duty costs being a key factor.
Stamp duty on share purchases is 0.5pc compared with a minimum of 5pc that a landlord must pay on individual buy-to-let property purchases – climbing to 17pc.
Landlords can buy a limited company that contains one or multiple properties. If the single property is a high-value buy-to-let, the landlord can still make a significant stamp duty saving.
But you’ll need to make sure the sums add up. Taking over a company comes with higher accountancy and legal costs given its added complexity, so if the company contains just one lower-value buy-to-let, it may be cheaper to purchase the property itself, rather than the company.
Another benefit is that ownership of the properties remains with the company, so there’s no need to transfer multiple legal titles into a new name, which saves time. However, each property title must still be thoroughly checked by a solicitor. When you’re ready to complete the transaction, a share purchase agreement, among other documents, must be signed.
Existing mortgages may be kept in place if the lender agrees to the change of director, but if they decline, it can trigger costly early repayment charges and the need to raise finance to repay the debts.
Few lenders offer finance to purchase shares in a limited company. Those that do offer a commercial mortgage. A specialist broker can advise you on the best option.
Beware hidden liabilities
As attractive as the stamp duty rate may be, purchasing buy-to-let properties this way comes with more risk, said accountant Simon Thandi, director of UK Landlord Tax, which specialises in share purchases.
“As some landlords exit the market, they’re choosing to offload the company as a whole, rather than sell their properties individually,” he said. “This has created a new market; an opportunity for someone who wants to buy properties already within a limited company to simply buy shares.
“But all is not what it seems. Investigating a company is a bit like lifting a rock and looking at the life underneath.”
Historic tax, legal or contractual liabilities remain with the company and become your problem – even if you didn’t know about them when you purchased the company shares.
Dean Poster, partner at law firm Mishcon de Reya, said: “When you’re buying a company, you’re buying the assets and all the liabilities, whether known or unknown, and that’s the issue.
“Not only do you have the separate obligations of running a company, Companies House administration and filing accounts at the end of each year, there’s also all the contracts that the company has entered into and any litigation that may be ongoing when you take over the company, which remains liable as the corporate vehicle for that claim.”
How to protect yourself from a ‘bad’ deal
Luckily, there are ways to minimise the risk of inheriting unknown liabilities.
Buyers can ask for warranties from the seller that give assurances that the company is clean. If it turns out not to be, you can seek financial compensation.
Mr Poster said: “Like anything, a warranty is only as good as the person or company giving it. If the seller is a company and you need to make a claim, there’s a risk it may be insolvent.
“If it’s a person, there’s a risk they can’t be found or they are bankrupt. Your solicitor will look closely at the strength of the person or corporation giving that warranty.”
Alternatively, buyers can opt for warranty and indemnity insurance. If you have one of these policies, instead of pursuing the seller for any liabilities discovered, you claim against the insurer.
These policies can be expensive, however – and often feature in price negotiations before a sale goes ahead. So do future capital gains liabilities, said Mr Thandi.
The incoming director will bear the brunt of the capital gains tax liability for the increase in the value of properties when they are sold. HMRC will calculate the gain from when they were first purchased by the company, not when you took over the company. If the properties have been in the company’s ownership for decades, you could wind up with an eye-watering tax bill.
Mr Thandi said: “We work out what the inherent gain is for our client and negotiate that off the purchase price.”
Investors should work with a trio of specialists: an accountant, lawyer and mortgage broker who carry out company share purchases regularly.
Between them, they’ll find out the best financing options, whether you’ll be subject to early repayment charges – which can be knocked off the purchase price – whether existing employees (usually spouses) will resign, and whether the company must be extracted from block insurance or management contracts.