Setting up a limited company for buy-to-let property investment
What is a property investment company?
What exactly is a limited company? What does running a company involve and why do so many property investors choose them?
What is a limited company?
In a nutshell, a limited company is a legal entity that’s separate from you as an individual.
Limited companies that are set up for investing in property are sometimes called Special Purpose Vehicles, or SPVs.
A limited company is allowed to make contracts (i.e. purchasing a property) and is liable in its own right for any business debts. This means that your personal assets are protected and are separate to your company.
When you set up a limited company, and purchase a buy to let property through that company, your company owns the property: you don't.
What is a special purpose vehicle (SPV)?
A special purpose vehicle (SPV) is simply a regular limited company which is used solely for a particular purpose. In the case of property investment, it's used to purchase and rent out properties. If you have another business (perhaps contracting or consulting) it's recommended that you don't combine this with your rental properties - it can complicate getting a mortgage. Lenders prefer properties to be held inside a separate SPV, set up for this purpose.
What is a SIC code?
A standard industry classification code (SIC code), describes what your company's business activities will be.
It’s really important to select the right SIC code, as this will signify to lenders that your company is an SPV for property investment.
If you’re building an investment portfolio and plan to apply for a buy-to-let mortgage, these are the relevant SIC codes:
68209 - ‘Other letting and operating of own or leased real estate’
68100 - ‘Buying and selling of real estate’
Some mortgage lenders prefer you to have both of these SIC codes attached to the company, even if you're only doing one of those trades. It's always worth double checking this with your mortgage broker before you set your company up.
What's the difference between personal and limited company owned property?
Personally owned
When you buy a property personally, the deeds are in your name, the mortgage is in your name and you personally pay income tax on rental profits. You’re responsible for the mortgage repayments and you personally carry the risk if anything goes wrong.
Limited company owned
When you buy through a limited company, you own the company, or a portion of the company if there is more than one shareholder. The company then buys the properties, the mortgages are in the company's name and the company pays corporation tax on rental profits.
Why do landlords invest using a limited company?
A key reason many property investors prefer to purchase buy-to-lets in a limited company is due to the flexibility a company offers.
Limited companies offer a way to manage tax liabilities on profit more flexibly and effectively, particularly if you’re building a portfolio.
This includes things like:
claiming mortgage interest
better taxation rates for higher rate earners
paying into a tax efficient pension
building profit within the company for future investment
What is Section 24?
One of the top reasons for choosing a limited company, is the ability to claim mortgage interest relief, also known as Section 24.
Section 24 refers to changes in tax legislation that restricts the tax relief landlords can claim on mortgage interest.
Before 2021, landlords who were higher and basic rate taxpayers, could claim 100% of their mortgage interest costs as an expense. However, now the amount they can claim is restricted to 20%, which increases the amount of tax paid on rental income.
Limited companies, however, are unaffected by Section 24, and can still claim 100% of mortgage interest costs. This is why many investors find a limited company more tax efficient, particularly if they pay the higher or additional rate of income tax.
Our Intro to Property Tax Guide looks at the specific tax differences between limited companies and personally owned property in more detail.
Running a limited company
When you set up your company, you become a director, and this comes with certain legal responsibilities, including:
keeping accurate financial company records
filing the company accounts and other annual forms with Companies House
submitting the corporation tax return to HMRC
paying the right amount of tax to HMRC
For personally held portfolios, many landlords are confident in submitting tax returns themselves. Limited company accounts can be sigificantly more complicated and many landlords use an accountant, like Provestor, to support them.
With Provestor, you can manage your company's compliance yourself. Our property tax software makes it straightforward to maintain your company’s compliance because it’s directly linked to Companies House and HMRC. So you can submit your company accounts and tax returns like a pro directly through our app.
The importance of correct company structure
When setting up or incorporating a limited company, you - or your accountant - will register your company at Companies House.
There are a few decisions you'll need to make when you set up a limited company.
You'll choose a unique company name
You'll appoint yourself and possibly other people as directors and shareholders
You'll decide on your company’s registered address, which goes on the public register at Companies House
You’ll define your company’s business activities using SIC codes
You'll assign shares, allowing your shareholders to be paid a percentage of the profits in dividends
Structuring your company correctly to align with your investment goals is really important. We cover this in more detail, including different tax efficient share structures in chapter 3.
We’d always recommend getting property tax advice from an expert. It’s realistic that most property portfolios will be worth seven figure sums, so it’s essential to make sure that your company foundations are right and you don’t have tax issues in the future.
Get more from your investment with expert tax advice
Next, we'll look at the pros and cons of limited companies in more detail.
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