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Should I set up a Ltd Company for my Buy-to-Let Property?

This guide was last updated 14 February 2024

Because of the various tax changes landlords have faced in recent years, many rental property owners have switched to using a limited company to own their investment properties rather than owning them in their personal names.

There are pros and cons to each type of ownership but what is the best for you?

In this guide, we will look at the tax changes, how they have affected landlords, the advantages of using a limited company, whether you should do the same, and how to make the change.

NB/ Coreco are not tax advisers and we strongly advise you to take independent tax advice before purchasing a Buy-to-Let property.

What tax changes have there been?

Back in 2016, the government decided that all second property purchases including buy-to-let rental properties, second homes, and holiday lets should have an additional 3% stamp duty charge called Additional Stamp Duty Land Tax (ASDLT).

This was the first of two taxation changes that significantly changed the profitability for landlords, by placing a burden on acquiring any residential property that is not the buyer’s main residence.

The second tax change, which occurred a year later and phased in over the next five years, was potentially an even bigger revenue generator for the Treasury.

The change was in what landlords who own rental properties in their own name can list as an expense to reduce their income before tax was calculated.

Prior to the change, landlords who owned property in their own name could offset many costs (mainly the interest on any mortgage outstanding on the property) against rental income before tax was calculated.

Currently, landlords whose properties are in their own name must add all the rental income to their own personal income, to calculate the tax they have to pay.

This has resulted in very little mortgage interest that can be offset against rental income. You can see an example of the differences this change made below:

Monthly rent – £1,200

Monthly interest payment to a lender – £700

  • Before the changeAnnual rent minus annual interest paid = gross (taxable) profit = (£1,200 x 12) – (£700 x 12) = £14,400 – £8,400 = £6,000.If the landlords is a higher rate tax payer then the tax due would be 40% of £6,000 = £2,400 tax due.
  • After the changeWhen interest paid on a mortgage secured on a rental property can no longer be offset – gross profit = £1,200 x 12 = £14,000. Higher rate tax of 40% = £14,000 x 0.4 = £5,760 tax due.

That is a difference in tax paid of £3,360 per year, per property!

There are some costs that can still be offset to reduce the gross profit but the switch the government made has severely impacted the profit of many landlords–some of whom now have loss-making properties because of this change.

As a result of this change, many landlords have used limited companies to buy, sell, rent and manage their rental property portfolios. Let’s look at the reasons.

Benefits of switching to a limited company

In the world of taxation, a limited company (officially recognised as a ‘business’) can offset all its costs against revenue, to come to a figure of ‘gross profit’ upon which tax is due.

This means that limited companies can still offset all the interest payments on mortgages secured against their rental properties.

That is a significant saving each and every year!

Limited companies also pay less tax than individuals, currently 19%.

Directors can take a small (taxed) salary and dividends, which are only taxed at 8.75% currently.

This means you will probably pay significantly less tax on the income you receive from your limited company than you would as an individual.

If you do not need the income, then you can leave it in the business and not pay tax on it, so it can grow quickly within the business – a very useful fact if you are looking to grow your rental portfolio and need deposits to buy more property.

But what about later on in life?

Many landlords buy and rent property in order to grow wealth within their families and therefore want to pass on the empire they have worked hard to procure and manage.

If everything is owned in personal names, then upon death, those properties would be included in their estates. Given the relatively low Inheritance Tax thresholds, the tax bill for the children or grandchildren could be very large indeed.

Having a rental portfolio within a limited company means you can add partners, children, or even grandchildren as directors, transferring your shares and ownership to them over time.

This means the properties themselves stay within the company and therefore, never form part of your estate for inheritance tax purposes. There will still be some taxes to pay and, like everything when it comes to taxation, you should engage a tax specialist to assist with inheritance tax planning.

Should I use a limited company for buy-to-let?

Well, this is the main question, and even though many landlords are doing just that, there are things to consider.

The biggest issue is regarding rental properties you already own in your own, personal name.

Transferring ownership of a property to a limited company is, technically, selling something from one legal entity to another and that means stamp duty is payable.

There are some relatively complex ways of doing it and avoiding stamp duty but they do not apply to all such transactions and you should get specialist tax advice before embarking on those journeys.

No one likes a retrospective tax bill!

A consideration for many is Capital Gains Tax (CGT).

CGT becomes payable on the disposal of an asset such as property and given how much property prices have increased in recent years across much of the UK, the CGT bill could be considerable.

So, before you rush to convert your personally owned rental properties to a limited company, you should get qualified tax advice to see what the CGT liability is likely to be and if there is anything you can do to mitigate it.

For a rudimentary CGT calculator, you can try this one from HMRC.  There are lenders who will allow capital raising to settle transactional costs for things like CGT and professional fees though.

If you are looking to buy a rental property, then for all the above tax reasons you should consider using a limited company, especially if you are already a higher rate taxpayer or above, or you are looking to grow a portfolio.

You should engage the services of a specialist tax adviser or accountant to help set up your company (up to 48 hours) and you will need to compile annual accounts to be submitted to Companies House each year.

What are the disadvantages of using a limited company?

Setting up and running a limited company requires more administration but the benefits usually far outweigh the extra effort required.

You will need to prepare annual accounts and likely keep an accountant for such tasks. If you exit the rental market, you will also have to wind the company up, and again there are costs.

The benefits usually make that worthwhile, however!

How to set up a limited company for buy to let

Unless you have done this before we would always recommend using an accountant and preferably one with experience in property taxation.

If you do not know any accountants, then you could find one using such websites as ICAEW or IFA, or ACCA.

Lenders will want to know the ‘SIC’ codes that your business is registered under, to be considered a Special Purpose Vehicle (SPV) for the activities of buying, selling, renting, and managing the property.

The codes lenders expect to be used are 68100, 68209, 68320, and 68201. Your limited company will need at least one of these to be acceptable to lenders.

There is no minimum length of time that the company needs to have been set up/trading, so it can be used for lending purposes the day after it is registered at companies house.

For more information on BTL Mortgages please do not hesitate to contact one of our professional, friendly advisers!

Give us a call on 020 7220 5110 or fill out the form below to arrange a no-obligation chat!

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    Andrew Montlake

    Written by Andrew Montlake

    Andrew Montlake, better known as Monty, began his journey with an Hons degree in Economics & Politics before starting in the mortgage industry in February 1994. As a main founder of Coreco in 2009, he successfully grew the brand, marketing, and communications, and was made MD in 2019 focussing on the overall vision, strategy, and culture of the company. As Coreco’s media spokesperson, Andrew can often be seen or heard on TV and radio as well as regularly commenting in the national, local, and trade press. He is the author of this acclaimed Mortgage Blog and is well-known for his social media, podcasts, and public speaking. Andrew is now proud to serve as Chairman of the Association of Mortgage Intermediaries, (AMI) as a cheerleader for the Mortgage Industry as a whole and continues to work at the coal face, writing mortgage business and advising clients.

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