Limited vs personal: How should I buy my first buy-to-let property?

Ltd vs personal: what’s the difference?

Whether you're a first-time buyer or an experienced landlord, it's worth considering the key differences between buying an investment property personally or through a limited company. Owning property personally makes you personally liable for any debts or legal issues, and subject to personal income tax and capital gains tax. Whereas, owning property through a limited company creates a separate legal entity that limits your personal liability, but requires more administration and is subject to corporation tax on profits. It’s important to consider the tax implications of each before making an informed decision.

Examples of tax paid on investment property

The table below outlines the key property taxes that both private and limited company landlords need to know about:

Buying property personally

If you decide to invest in property personally under your name, the property deeds and mortgage will be registered to you as an individual, and you will personally pay income tax on any profits from your buy-to-let property. You can calculate your profit by deducting your allowable expenses from your rental income. This amount will then be subject to income tax at your standard rate.

The following table shows the Income Tax rates and bands:

Due to Section 24, landlords are now unable to deduct mortgage interest as an expense for personally owned properties (other than FHL). That means that those who fall under the higher or additional rate tax bracket will now have to pay an increased amount of tax. There is now a (20%) reduction from your tax liability for mortgage interest payments and other financing costs, such as mortgage broker fees.

Buying property in a limited company

If you choose to invest in property through a limited company, you own the company and the company owns the properties. The company will then purchase the buy-to-let properties, hold the mortgages, and pay corporation tax on any profits.

To calculate the company's profits, you can deduct the allowable expenses from the rental income, just as you would for other types of property ownership. However, in a limited company the entire mortgage interest payment is tax allowable, reducing the profit and consequently, the tax liability. If you choose to retain this profit within the company, such as for future property investments, there would be no further tax obligations.

Advantages of buying property through a limited company

Buying property in a limited company can offer several benefits, particularly for higher rate taxpayers and those planning on building their property investment portfolio. Here are some of the main advantages:

1. Improved tax efficiencies and planning

Holding properties in a limited company means you can take advantage of lower tax rates, enabling you to keep more of your profits. Rather than being taxed at your personal income tax rate, which can be costly (especially if you’re a higher rate taxpayer), the rental profit on properties held in a limited company is taxed at the current rate of corporation tax, which tends to be significantly lower. This provides potential tax savings that can boost your profits over time.

2. More financial flexibility

As a director of a limited company, you have greater flexibility in how to manage the profits, whether it's reinvesting in more properties, contributing to your pension, distributing the profit via tax-efficient dividends or paying yourself a salary. If you’ve loaned your company money, for example for a property deposit, this can also be repaid to you tax-free from your company’s available funds.

3. Portfolio expansion

Are you looking to expand your property portfolio? By retaining your profits within the company, you can fund future property purchases without being subject to income tax (until you choose to withdraw the profits out of the company). This can provide greater flexibility in your investments whilst expanding your property portfolio faster.

4. Inheritance planning

Owning property within a limited company can provide more options for inheritance tax planning, making it easier to transfer your business to your family in the future. Since the property remains owned by the company, it may also be shielded from stamp duty, inheritance tax, and capital gains tax liabilities, providing additional protection for your investments.

Disadvantages of buying property through a limited company

Whilst buying property through a limited company can be beneficial, if you are only planning on renting out one or two properties then it may not l be the right choice. There are also some potential downsides to using a limited company which you should be aware of before making an informed decision. Here are some of the main disadvantages to consider:

1. No capital gains tax allowance

When you sell your property through a limited company, you have to pay corporation tax. You pay this on all of the profits made from the sale of the property. The amount of corporation tax owed on the profit from the sale of the property will depend on the company's taxable profits for that year, taking into account any allowable expenses and deductions. However, if you own property personally, you only have to pay capital gains tax on the overall gains made above your tax-free allowance of £6,000.

2. Dividends, and double taxation

If you would like to take profit out of the limited company you can take dividends. Dividends are generally more tax efficient compared to paying a salary. One thing to be aware of when taking money out of your company is double taxation. This occurs when a company pays corporation tax on its profits, and then the shareholders pay additional tax on the dividend income received from these profits.

The good news is that you do receive a tax-free dividend allowance of £1,000, and will only pay tax on the dividends you take above that amount. If the dividend income exceeds your allowance, then you may have to pay tax on the excess. The amount of tax you will pay will depend on your Income Tax band, and is calculated on a Self Assessment tax return each year.

Tax is paid on any dividends received over £1,000 at the following rates:

The taxation of dividends can be a complex process, and will depend on your individual circumstances. This is why it’s important to consider the implications of using a limited company and seek professional tax advice.

3. Mortgage rates and choice

Getting a buy-to-let mortgage as a limited company can be more expensive and complicated than as an individual landlord. Lenders see it as riskier and more complex, this is because it involves additional legal and administrative processes. This means higher mortgage rates, fees, and deposits for limited companies. However, many landlords still choose to invest in property through a limited company because of the tax benefits it provides. So, while it might cost more upfront, it can be more profitable in the long run.

4. More complex accounting and record keeping

Limited companies are required to maintain accurate and up-to-date financial records, including detailed accounts of all income and expenses related to the property. This can include everything from rental income and property management fees, to repairs and maintenance costs. In addition to this, limited companies are also required to prepare and file annual accounts and corporation tax returns with HMRC. This process can be time-consuming and complex, particularly if you're not familiar with the requirements and deadlines involved.

The tax implications associated with purchasing buy-to-let property can be complicated and will differ from person to person. We always advise seeking independent tax advice from a specialist before making any significant decisions regarding your investment plans.

Making the right choices for your personal investment goals

In summary, establishing a limited company can be a wise decision for property investors looking to grow their portfolio, enhance their tax efficiency and safeguard their assets.

While buying in a limited company may not be advantageous for those with a small number of properties or basic rate taxpayers, it can be advantageous for growing portfolios and provide significant savings for higher rate taxpayers.

Despite common misconceptions about the complexities of limited companies, the process can be smooth with support from a specialised property accountant firm like Provestor. If you're interested in setting up a limited company for your property investments, we can help. Our experienced property tax advisors give professional advice tailored to your personal circumstances, to get your company set up correctly for your investment goals.