Expert Guide

Setting up a limited company for buy-to-let property investment

Advantages and disadvantages of limited companies

Limited companies can be a great choice for many property investors but they’re not right for everyone. Some landlords may actually be better off owning property in their personal name. We’ll cover the pros and cons of limited companies, to help you decide if a limited company is the right option for your property investment business.

Need personalised advice about whether a limited company is right for you? Book a consultation with a property tax expert →

Advantages of limited companies

Section 24 doesn’t apply

Firstly, and one of the main reasons many landlords use limited companies is better taxation of mortgage interest, aka Section 24, as mentioned previously. A limited company can offset 100% of the mortgage interest, reducing profits and the amount of tax paid.

Better taxation for higher rate taxpayers

Holding property in a limited company can offer tax benefits. If you’re a higher rate taxpayer or plan on owning multiple properties, you’ll especially find there’s a tax saving. When you own a property personally in your name, the rental profit is added to your other earnings (such as from your job) and taxed as income tax.

Rental profits on properties held in a limited company are not taxed at your personal tax rate but the current rate of corporation tax, which tends to be around half of the higher rate of income tax.

More flexible for tax planning and saving

As a company director, you have the flexibility to choose what to do with the profits. You can invest in further properties, save into a tax-efficient pension or pay out the profit strategically using dividends. This flexibility can help with your personal tax planning compared to personally owned properties.

You can read more about tax for property investors in our expert-authored guide, Introduction to Property Tax.

Better for growing portfolios

Planning to expand your property portfolio? If you’re a higher rate taxpayer looking to build your portfolio you’ll especially find there’s a tax saving using a limited company. You can retain your profits within the company to fund future purchases without them being subject to income tax (until you decide to draw the profits out of the company). Retaining earnings within the company helps to protect them from tax liabilities, so you can repay any debt and expand your property portfolio faster.

Better for inheritance tax and legacy planning

Property held within a company gives more options when it comes to planning for inheritance tax.

If you plan to pass your business on to your family in the future, it’s much simpler to transfer a limited company than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.

Depending on how your company is structured, you could add your children and grandchildren as company shareholders.

Disadvantages of limited companies

More expensive for basic rate taxpayers

If you're a basic rate taxpayer with one to two properties, the costs of running a limited company are likely to outweigh the benefits. Basic rate taxpayers are less affected by Section 24, and if you’re happy with your rental profits and your portfolio, you may be better off staying as you are.

However, if your salary from your job increases, or your profits go up with a rent increase, you may cross the threshold from basic rate to a higher rate of tax. In which case, Section 24 would impact your profits. If your earnings are going up, this is definitely something you should keep a close eye on and you might want to consider a limited company.

Additional legal responsibilities and costs

There are additional legal and financial responsibilities to consider.

As a director of a company, you’ll legally be required to keep accurate company and financial records and submit the appropriate accounts and returns to Companies House and HMRC. Most people appoint an accountant to deal with this. That’s exactly what we do here at Provestor: we’re a specialist property accountant and we’ll manage the majority of your accounts for you, while you focus on building your portfolio.

You'll need to budget around £1000 a year for a limited company accountant and make sure that the tax benefits of a limited company outweigh this extra cost.

Double taxation applies if taking a salary and dividends

Something that not many people talk about is double taxation. In a limited company, you pay corporation tax on your profits. If you want to take profits out, either using a salary or dividends, you’ll need to pay income tax. There are strategies to mitigate double taxation, however if you need to regularly take profit out of your company, it’s certainly a good idea to get tax advice and a strategy in place that works for you right from the start.

No capital gains tax allowance when selling

If you sell a rental property personally, you’ll need to pay capital gains tax but you do get a tax-free allowance.

If you’re selling through a limited company, you don’t get the tax-free allowance but the rate of tax is lower (limited companies pay corporation tax on gains.) However, this can be offset by the increased tax efficiency available throughout the rental lifetime of the property, and, for higher rate taxpayers, the tax rate paid through a company could be lower.

The tax implications are complicated, and everyone’s personal tax liability will be different. If selling property is a key part of your strategy, it’s worth getting some tax advice before making any big decisions.

BTL mortgages are more expensive in a company

Currently, many lenders charge higher interest rates and fees to limited companies compared to individual buy-to-let mortgages. On the plus side, lenders’ stress testing is often more favourable for lending to limited companies over personal ownership. It’s worth finding a specialist limited company mortgage broker who can find the best deal for you.

Overall, there’s quite a lot to consider. There are plenty of benefits but also additional costs and more complexity. Crunch the numbers or chat to an expert to make sure that the tax savings outweigh the additional costs of a limited company.

If you need advice, our property tax advisors are here to help. Take the time to weigh up all the pros and cons before deciding if a limited company is right for you and your investment goals.

Start up with Provestor

Whenever you’re ready, here are 4 ways we can help you start and manage your buy-to-let limited company:

  • Tax Advice. Talk through your options and increase your confidence by booking a tax consultation with our Chartered Property Tax Advisors.

  • Company Start Up. For a smooth start and to avoid costly mistakes, our expert team can incorporate your limited company, for less than you think.

  • Accounting Tax App. Keep on top of your finances in minutes, and prepare and directly submit your accounts and tax returns, with our easy-to-use property accounting app, designed specifically for landlords.

  • Advisory Service. As your portfolio expands, the complexity of your financial needs grows too. Provestor’s Advisory Service is the next step for investors seeking a deeper level of support and tax expertise.

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