In recent years there has been a huge growth in the number of property investors buying property through a limited company. Property Geek’s website shows up to 80% of new buy-to-let mortgage applications are now for limited companies.
As recently as five years ago, only a small number of property investments were purchased in this way. However, everything changed in 2017 when new rules about mortgage tax relief made limited status a tax-efficient choice for some investors. But before you hit the Companies House website, there are a number of downsides to limited company status that you need to consider.
If you are a first-time buy-to-let buyer, you should take professional investment and tax advice because it depends on your personal circumstances and long-term plans. There are pros and cons to investing in property through a limited company, so you need to weigh up your options.
If you only ever intend to own and rent out a few properties, then using a limited company might not be the best option for you. However, if you are looking to build a sizeable property empire, then it might be a good option to set up a limited company from the outset. You will benefit from tax savings and avoid fees that are payable if you transfer any properties into it further down the line.
Setting yourself up as a limited company can be a good choice if you pay a higher rate of income tax. The higher income tax rate of 40% is payable on taxable income between £50,271 and £150,000. The additional rate of 45% is payable on taxable income over £150,000.
Instead, landlords who hold buy-to-let properties through a limited company only pay corporation tax which is currently 19% (rising to 25% in April 2023).
As well as paying a lower tax rate, landlords who own their property through a limited company can continue to deduct mortgage interest costs from their taxable profit.
Historically, having a buy-to-let business was more profitable because landlords could deduct their mortgage interest (plus associated costs like arrangement fees) along with other allowable expenses to determine their taxable profit. In 2017, the rules were changed to phase this out gradually. As of April 2020, landlords who own their property as an individual cannot deduct mortgage interest costs from their taxable profit. Instead, everyone can claim a basic rate deduction of 20% of their mortgage interest costs.
As a simple example, consider a landlord whose property:
Under the old rules, a basic-rate taxpayer would pay £800 in tax (20% of £4,000), and a higher-rate taxpayer would pay £1,600 (40% of £4,000).
Under the new rules, the mortgage interest is not deductible, so in the above example, the taxable profit is £9,000. But everyone can claim mortgage interest tax relief at 20%, which in this example would be £1,000. So, a basic rate taxpayer will still pay £800 in tax (20% of £9,000 = £1,800, less £1,000). But the higher rate taxpayer will now pay £2,600 in tax (40% of £9,000 = £3,600, less £1,000).
If the property is owned as a company, you can continue to deduct mortgage interest from your taxable profit.
One benefit of managing your buy-to-let property business as a limited company is that you will be legally separate from your business affairs. If you come into financial difficulties or a claim is made against you, you won’t be personally liable, and your home and separate assets will be protected.
Buying your investment properties through a limited company could reduce the potential inheritance tax your family would have to pay after you are gone. It might be possible to make them shareholders of the limited company, but it is essential first to take professional tax and business advice.
It may be possible for you to borrow more money for a buy-to-let mortgage through a limited company compared to doing it personally. Lenders usually require a higher amount of rental income as a percentage of the loan repayments for individuals.
In the past, lenders haven’t always liked giving companies mortgages as they are considered riskier. However, the growth in popularity of limited company status for buy-to-let means more products are coming onto the market. However, you may need to shop around as rates aren’t always as favourable.
Changing the ownership of the property from personal to a company could also mean changing your mortgage, if you have one. This could trigger early repayment fees, additional legal and valuation fees, and the higher rates mentioned above.
It could be costly if you have purchased your buy-to-let property personally and wish to put it into a limited company. You must sell the property and repurchase it through your limited company. By doing this, you could be liable for capital gains tax if the property has increased in value.
If you are a higher-rate taxpayer, then the rate of capital gains tax that you will pay for residential property is 28%. If you are a lower/basic rate taxpayer, the capital gains rate you pay will depend on several factors, including the amount you have gained and your exact taxable income.
Once the property is held within a limited company, if you decide to sell it in the future, then the company would only have to pay corporation tax on the increase in value (profit) instead.
You will also be liable to pay stamp duty when you repurchase the property through the limited company. On top of this, you will need to pay a 3% surcharge on the rate of stamp duty owed due to owning a second home.
If you want to use your rental property to supplement your income, you will need to pay tax on the money you take out of the company – i.e. your dividends. The dividend tax is as much as 33.75% for additional taxpayers if you take out more than your dividend allowance of £2,000.
There are costs associated with running a limited company, and it may take up more of your time than managing properties as a private individual. You will be required to prepare detailed accounts, which may involve paying professional fees to accountants and lawyers.
The cheapest and easiest way to set up your limited company is to apply online, where you will only pay a small £12 fee to register. Within 24 hours, your new company will be officially registered in England. Alternatively, you can apply by post. However, registration can take between 8 and 10 days and cost a lot more – £40. Same-day service is also available, but this will cost you £100.
It’s worth weighing up the pros and cons of purchasing property through a limited company. However, before you decide, make sure you get proper professional advice.
If you are thinking of buy-to-let in the Brighton and Hove area, we can help. Contact us to find out more about our services and the properties we have available right now.
Do you have any questions about the topic above? Our team of experts is here to help in answering any query you may have.
Fueled by his desire to be the best, most reputable estate and lettings agent in town, Steve has spent his career cultivating The Property Shop. Steve prides himself on his authenticity, honesty, and knowledge-base which is emulated by The Property Shop and his team.
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