Buying a Buy-to-Let Property Through a Limited Company: Pros, Cons, Tax Savings & Mortgage Insights
Pros of Buying a Buy-to-Let Property Through a Limited Company
More Tax Efficiency For Some Investors
One of the main attractions of using a limited company is the potential tax benefits. Rental income received by individuals is subject to income tax, which can be as high as 45% for higher-rate taxpayers. In contrast, profits within a limited company are taxed at the corporation tax rate, which is currently 25% (subject to profit levels). This can result in significant tax savings, particularly for those in higher tax brackets.
Mortgage Interest Tax Relief
Since 2020, private landlords can no longer deduct mortgage interest from their rental income when calculating tax. Instead, they receive a 20% tax credit, which is less beneficial for higher-rate taxpayers. Limited companies, however, can still deduct mortgage interest as a business expense, reducing their taxable profit and, consequently, their tax liability.
Limited Liability Protection
A limited company provides a legal separation between you and your investment properties. This means that if the company encounters financial difficulties, your personal assets are protected, offering a layer of security not available when buying as an individual.
Greater Flexibility in Tax Planning
Through a limited company, landlords have more options when it comes to tax planning. For example, income can be drawn in the form of dividends, which may be taxed more efficiently than rental income. Additionally, business owners can structure ownership among family members to distribute income in a tax-efficient manner.
Easier Portfolio Growth By Retained Profits
If you plan to expand your property portfolio, buying through a limited company can offer advantages. Limited companies often have access to different mortgage products tailored for portfolio landlords. Additionally, retained profits within the company can be reinvested without immediate tax implications, accelerating portfolio growth.
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Cons of Buying a Buy-to-Let Property Through a Limited Company
Potentially Higher Mortgage Rates
While the number of lenders offering limited company buy-to-let mortgages has increased, interest rates tend to be higher compared to personal buy-to-let mortgages. This can result in higher borrowing costs, reducing overall profitability.
Additional Administrative Responsibilities
Running a limited company involves additional administrative work, including filing annual accounts, tax returns, and complying with Companies House regulations. Many landlords choose to hire an accountant, adding to their overall costs.
No Capital Gains Tax (CGT) Allowance
When selling a personally owned buy-to-let property, landlords can benefit from a Capital Gains Tax (CGT) allowance, currently set at £3,000. Limited companies, however, do not receive this allowance, meaning all gains are taxed at the prevailing corporation tax rate.
Costs of Transferring an Existing Property
If you already own buy-to-let properties in your personal name and wish to transfer them into a limited company, there are significant costs involved. The process is treated as a sale, meaning you may incur Stamp Duty Land Tax (SDLT), Capital Gains Tax, and legal fees. To find out your potential stamp duty cost you can use our buy to let stamp duty calculator.
Less Mortgage Choice
Although the market for limited company buy-to-let mortgages is growing, the number of products available is still lower than for individual landlords. This means fewer options when shopping for the best mortgage rates and terms.
Is a Limited Company Buy-to-Let Right for You?
Whether you should purchase a buy-to-let property through a limited company depends on your individual circumstances, including tax position, investment goals, and long-term plans. It is crucial to consider all the financial and administrative implications before making a decision.
To consider both routes, you should talk to a qualified tax adviser as a mortgage adviser will only be able to advise on the products, whereas a tax adviser can assess your potential liability and help you decide which route is best for you.
Conclusion
Buying a buy-to-let property through a limited company offers several benefits, particularly in terms of tax efficiency and asset protection. However, it also comes with additional costs, responsibilities, and potential mortgage restrictions.
To find out the best approach for your buy-to-let investment, contact a tax adviser that can guide you in this area.
To find out more about the products, our expert advisers can help you weigh up your options, ensuring you make an informed decision that aligns with your financial goals. Contact Kerr & Watson Today!
