How Do I Set Up a Buy-to-Let Company? Part 3/3

by
GetGround

In this final instalment of our trio of blog posts offering guidance about setting up a BTL company, we take a look at the various legal documents required when forming a company. 

More than 60% of all UK buy-to-let purchases made in 2020 were done through companies. In 2015 that proportion was just 15%. This sharp increase has primarily been driven by better technology allowing for companies to be created at a more affordable cost, and legal changes which can make taxes more efficient when properties are held in a company as opposed to a personal name.

While company BTL has become the standard way to invest in property, most investors do not set up their limited companies correctly to maximize on their potential investment returns. The advantages of investing through companies are determined by the way the company is structured, the quality of its legal documentation, and the continuous management of that company.

This blog should only serve as a guide. Should you have any concerns about your specific circumstances, please make sure to consult your advisor before forming or structuring your limited company. 

‍

What legal documents are required, and what do they mean?

‍

What is a Memorandum & Articles of Association?

The Articles of Association essentially write out the rules of the company, setting out how the company is run, governed and administered. They also spell out the powers and responsibilities of the directors.

Potential Pitfall: Although you can find memorandum & articles of association online, at times for free, you should make sure that the documents are well written, and that they are specific to your BTL company needs. This does not mean that the free ones won’t work for you, but it is useful to amend these to reflect specifically what your company will be doing, for instance, specific to buy-to-let businesses.

What GetGround offers: At GetGround, all our legal documents are of high quality and specific to BTL use-cases.


Owner (Director) Loan Agreement

To provide the company with the funds it requires to purchase the property you will need a Director or Owner Loan Agreement. You will then be able to repay this loan over time as the company makes revenue. 

But how does this work? In the first instance, you as the owner of your company provide an interest free loan to your BTL company. This is usually equal to the value of your property when you make your initial purchase but can also include costs and expenses of the property purchase. 

Then, as your company receives revenue from the rental income, the company is then able to make repayments to you on the loan it has benefitted from. The loan repayments are debt repayments and therefore do not form part of your income for tax purposes. You as the investor can then extract funds from the company tax-efficiently through loan repayment rather than only using dividends, which can be associated with higher tax rates for high income earners. 

A Director’s loan agreement essentially spells out how the above procedure works in detail. It is also important to keep in mind that for some lenders, they may typically only want to provide a loan to BTL companies with one director loan per property. 
It is often the case that for a shareholder’s overall tax position, it is better if the shareholder debt is interest free. This is because not needing to pay interest on the directors loan will ultimately cause the value of the company and therefore the shares to be higher. The end result is that on eventual disposal of the shares the additional value will be taxed as a capital gain, rather than as interest income.

Potential Pitfall: Many investors assume that applying a high interest rate to a Director or owner loan is a profitable way of extracting profits from the company. However this is typically not the case as interest payments are taxed at income tax rates, and means that you can lose money rather than make more post-tax profit.

Solution: Ensure that your Owner or Director loan has the right interest rate in order to prevent you from potential unnecessary negative tax impact. 

What GetGround offers: At GetGround, our Director or owner loan documents have a 0% interest rate as standard as they are designed for an individual investor or group of investors loaning the purchase price to their company, and are written specifically for BTL use cases. 


Shareholders’ Agreement:

Investors should look for a well written, and buy-to-let specific, shareholder’s agreement to protect your rights in your investment going forward.

The shareholders’ agreement sits alongside the Articles of Association. Its purpose is to protect the shareholders’ investments in the company, to establish and maintain the relationship between the shareholders, and to govern how the company is run.

The shareholders’ agreement lays out exactly how to do certain things and will set out how to resolve any dispute should the shareholders of the company have a disagreement. This is especially important if you are investing with family members or joint venture partners.

A good shareholder’s agreement is vital for a property holding company and ensures that it is clear how decisions between shareholders are made about the property investment. No shareholders agreement or a badly drafted one could leave your rights and investment options unclear and lead to a challenging situation which is costly to resolve in the future.

The shareholders’ agreement is private, which contrasts with the articles of association which are public. So investors tend to put commercial matters which they want to keep private in the shareholders’ agreement

Potential Pitfall: A well-written shareholder’s agreement is vital for protecting you and other shareholders, and for preventing costly disputes in the future.

What GetGround offers: At GetGround, all our legal documents are of high quality and specific to BTL use-cases.

‍

Ready to get started, or looking to learn more? Click on the button below.

Need help forming a company? E-mail us at info@getground.co.uk for more information.

GetGround

Want to get notified when we post articles?

Sign up below and we will email you when a new article is posted.