Purchasing Buy-to-Let property via a Limited Company

New research shows that 74% of landlords who intend to purchase buy-to-let property within the next year will do so through a limited company. The significant rise, up from 62% in Q1 2023, has been largely driven by recent tax reforms and the growing costs of running a rental portfolio caused by climbing interest rates.

However, whilst there are a number of potential tax benefits to operating via a limited company structure, each individual’s needs should be assessed accordingly. Specialist advice should be sought to understand the tax implications and ultimately decide the right course of action.

The potential benefits of owning buy-to-let property through a limited company include:

Corporation Tax

When operating via a limited company, the rental profits are subject to Corporation Tax, as opposed to Income Tax. If the landlord is a higher rate taxpayer, paying Corporation Tax at 25% (or as low as 19% dependent on the level of profits), as opposed to Income Tax at 40% could dramatically decrease their tax bill. There is also the added flexibility of how the landlord’s remuneration is structured, i.e. by way of a salary or dividends from the company.

Restriction of Finance Costs

One of the biggest changes to hit landlords holding rental properties personally is the restriction of finance costs, most commonly mortgage interest payments. Previously, mortgage interest payments could be deducted in full from rental profits. Now, landlords receive only a 20% tax credit on mortgage interest payments, leaving those landlords that are higher rate or additional rate taxpayers worse off. This restriction does not apply to limited companies, full relief is available for the deduction of mortgage interest payments.

Planning for the Future

For those planning to expand their property portfolio in future, or are buying multiple properties at once, it may make sense to set up a limited company sooner rather than later.

If properties are purchased personally (or are already owned personally) and transferred to a company later down the line, the properties must effectively be sold to the company at market value, making them potentially liable to both stamp duty land tax and capital gains tax. The exposure to these taxes could be prevented if the property is purchased through the company in the first instance and could save money in the long run if you plan to buy more property.

Although the above may seem like positive reasons to set up a limited company, there are some drawbacks to consider.

There may be fewer mortgage options available as fewer lenders offer buy-to-let mortgages to limited companies. The rates available may also potentially be higher.

Generally, there is also an additional administrative burden that comes with operating a limited company. Annual accounts must be filed with Companies House, in addition to annual confirmation statements.

When income is extracted from the company by way of dividends or by way of a salary, there is essentially a double tax charge. Corporation Tax is first charged on the company profits, then a further charge is levied on the individual personally by way of Income Tax.

This also applies when the properties are eventually sold. The company will pay Corporation Tax on the gain made on the property, then a further Income Tax charge is levied when the funds are extracted from the company.

There is no simple answer as to whether or not you should put your buy-to-let properties into a limited company and clearly one size does not fit all. If you are considering this method, please speak to a qualified tax advisor before making any decisions.

Please note, the above does not constitute tax advice. Please get in touch with Jenna or a call a member of our team on 0191 256 9500 to discuss your options and any queries you may have.