Investing in buy-to-let properties through a limited company has become an increasingly popular strategy among property investors in the UK. This approach can offer significant tax advantages, flexibility, and protection compared to holding properties in your personal name. In this guide, we’ll explore the key benefits of buying a buy-to-let property through a limited company, how to set up and manage the company, and the potential pitfalls to be aware of.
For many investors, the decision to purchase buy-to-let properties through a limited company is driven by the tax savings and financial flexibility it offers. Here are the main reasons why this approach is attractive:
Corporation Tax Benefits: When owning a buy-to-let property through a limited company, rental income is subject to corporation tax, which is currently 19% (as of 2024). This is lower than the higher rate of income tax for individuals, which can be as high as 45%. This allows landlords to retain more of their rental income, making buy-to-let investments more profitable over the long term.
Mortgage Interest Relief: One of the biggest advantages of using a limited company for buy-to-let investments is the ability to fully deduct mortgage interest as a business expense. Since April 2020, individual landlords can no longer claim full mortgage interest relief; instead, they receive a basic rate tax credit of 20%. Limited companies, however, can still deduct the full amount of interest before calculating their taxable profits, which can result in significant savings.
Tax-Efficient Profit Withdrawal: Owners of limited companies have more flexibility in how they withdraw profits from the business. Instead of receiving all income as salary (which is subject to income tax), directors can take dividends, which are taxed at a lower rate. Additionally, profits can be reinvested back into the business, delaying personal tax liability.
Limited Liability Protection: When you own a property through a limited company, your personal assets are legally separated from the company’s liabilities. This means that in the event of financial difficulty or legal disputes, your personal assets are protected, providing an added layer of security.
Estate Planning and Inheritance: Properties held within a limited company can be transferred more easily to family members or heirs through the sale of shares, offering potential inheritance tax planning benefits. This can simplify the process of passing on property portfolios and reducing tax liabilities for future generations.
Before you can start investing in buy-to-let properties through a limited company, you’ll need to set up the company and follow certain legal and financial procedures:
Company Formation: Setting up a limited company is straightforward and can be done online through Companies House. You’ll need to choose a company name, appoint at least one director (who is typically the property owner), and register the company’s address.
Share Structure: Decide how the company’s shares will be structured. If the company will have multiple owners (e.g., spouses or business partners), you’ll need to allocate shares according to ownership stakes. This can impact how dividends are distributed and how control of the company is managed.
Open a Business Bank Account: A separate business bank account is required for the limited company, as all rental income and expenses must be managed through this account. This ensures transparency and simplifies accounting.
Mortgage Options: Not all lenders offer buy-to-let mortgages to limited companies, and those that do may require higher deposits or offer slightly higher interest rates. However, the tax advantages often outweigh these higher upfront costs. It’s important to work with a mortgage broker who specializes in buy-to-let mortgages for limited companies to secure the best deal.
Accounting and Tax Reporting: Limited companies are required to file annual accounts with Companies House and submit a corporation tax return to HMRC. You may also need to register for VAT if your business income exceeds certain thresholds, although most buy-to-let companies do not need to register for VAT. It’s advisable to hire an accountant who specializes in property investment to ensure that all financial reporting and tax obligations are met.
Investing in buy-to-let properties through a limited company offers several tax benefits, but it’s important to understand how taxes work in this context:
Corporation Tax on Profits: As mentioned earlier, rental income earned by a limited company is subject to corporation tax, currently set at 19%. This can be lower than income tax rates that individual landlords would face.
Dividend Tax: When withdrawing profits as dividends, shareholders are subject to dividend tax. The current rates (as of 2024) are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers. Dividends are taxed more favorably than income from salaries, offering further tax savings.
Capital Gains Tax (CGT): If the company sells a buy-to-let property at a profit, the gain will be subject to corporation tax rather than individual capital gains tax. This can provide a more favorable tax outcome compared to individuals, where capital gains can be taxed up to 28%.
Stamp Duty Land Tax (SDLT): Companies are still subject to the additional 3% surcharge for buy-to-let and second properties when purchasing properties in the UK. However, if you are building a portfolio, the long-term tax savings could still make this approach beneficial.
Inheritance Tax Planning: Using a limited company structure may allow for more efficient estate planning. Shares in the company can be transferred to heirs, potentially reducing inheritance tax liabilities.
While there are many advantages to using a limited company for buy-to-let, there are some potential drawbacks to consider:
Higher Mortgage Rates: Limited companies may face slightly higher interest rates on buy-to-let mortgages compared to individual landlords. Lenders see limited companies as higher risk, and as such, may require larger deposits and charge higher fees.
Administrative Burden: Running a limited company comes with additional administrative responsibilities, including filing annual accounts, preparing corporation tax returns, and managing dividends. You may need to hire an accountant to handle these tasks, adding to your costs.
Profits Locked in the Company: While you can withdraw profits through dividends, if you retain profits within the company, they will remain in the business until you choose to take them out. This can be a drawback if you need immediate access to funds.
Transferring Existing Properties: If you already own buy-to-let properties in your personal name, transferring them to a limited company can be costly, as it triggers capital gains tax and stamp duty. This can make it less attractive for existing landlords to switch to a company structure.
Fraser Bond has extensive experience in helping investors navigate the buy-to-let market and setting up limited companies for property investment. Here’s how we can assist you:
Property Search and Investment Advice: We help you find the best buy-to-let properties that match your investment goals, whether through a limited company or individual ownership.
Expert Guidance: Our team provides expert advice on setting up and managing a limited company for buy-to-let investments, ensuring you understand the tax implications and financial benefits.
Mortgage and Financing Support: We work with specialist mortgage brokers to secure the best buy-to-let mortgage options for limited companies, helping you maximize your investment.
Ongoing Support: From initial setup to property management and portfolio growth, Fraser Bond offers end-to-end support to help you succeed in your buy-to-let investment journey.
Investing in buy-to-let properties through a limited company offers significant tax advantages and long-term flexibility. However, it’s important to understand the complexities involved and to seek professional guidance to ensure the strategy aligns with your financial goals.
Contact Fraser Bond today to explore buy-to-let opportunities through a limited company and learn how we can help you make the most of your property investments.
