Tax liabilities of limited company vs private landlords

“Does it matter whether I own investment property personally or through a limited company?” Depending on your investment goals, yes it does.

Investing in property is much tougher than it used to be. Increased regulation, stamp duty changes and decreasing tax relief means many property investors have seen a reduction in their rental revenue.

To combat these difficulties, more and more investors are deciding to buy properties through a limited company (sometimes called a property investment company or SPV - Special Purpose Vehicle.) A staggering 77% of all buy-to-let mortgage applications were made through limited companies in the first half of 2019. This increase is mostly due to the different treatments in taxation. Instead of paying income tax as an individual, a limited company pays corporation tax.

Running your own property investment company won’t be for everyone, but if you’re considering investing in a buy-to-let it’s an important option to consider. Getting your business structure right could make a big difference in the amount of tax you’ll be paying.

What are the tax differences between personally owned and limited company owned properties?

Personally owned properties

Tax on personally owned property is fairly straightforward: you deduct your allowable expenses from your rental income to arrive at the profit, on which you pay income tax at your normal rate. You can't claim your mortgage interest as an expense on personally owned properties. Instead, you now receive a basic rate (20%) reduction from your tax liability for any mortgage interest payments and other financing costs. This is bad news for higher and additional rate tax payers as it will mean you have more tax to pay.

Company owned properties

Tax on properties owned via limited companies is quite different, and far more flexible. Once again, you deduct the allowable expenses from the rental income to arrive at the company profits. However, the entire mortgage interest payment is tax allowable and will also reduce the profit, thus decreasing the amount of tax due. You then pay corporation tax rather than income tax on the profits. If you keep the profit inside the company (perhaps to save for another property) then there's no more tax to pay.

If you want to take profit out of your company and pay yourself personally, there are three main ways: salaries, dividends, and pension payments, and each one is taxed differently.

Property taxes at a glance

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

Property investment stageTaxPersonally OwnedLimited Company
BuyingStamp Duty Land Tax3% surcharge3% surcharge
SellingCapital Gains Tax£0 - £12,300 Capital Gain annual allowance Basic rate tax payer: 18% Higher & additional rate tax payer: 28%19% (Corporation tax)
Letting/generating revenueIncome tax£0 - £12,750 Tax free personal allowance Basic rate 20% - £37,500 Higher rate 40% - £50,000+ Additional rate 45% £150,000+ 19% (Corporation tax)
Estate planningInheritance tax (IHT)40% above £325k 7 year taper on giftsSame but on value of shares held

While this table is a handy summary for property investors, when it comes to tax there are a lot of different variables at play.

Take the time to weigh up all the pros and cons and chat to an expert before you choose whether owning investment property personally or through a limited company works best for you and your goals.