"Experts are reminding prospective landlords to move quickly in setting up their limited companies so they are well-poised to take full advantage."
In the UK, buy-to-let companies hold a total of 583,000 mortgaged properties, which is 29% of all buy-to-let mortgages. A figure which has increased over the last 12 months.
It comes as no surprise then, that in a recent survey by the National Residential Landlords Association and the London School of Economics, a third of landlords said the reforms have had the greatest effect on their rental business.
With the vast amount of opportunity on offer in the buy-to-let space this year, experts are reminding prospective landlords to move quickly in setting up their limited companies so they are well-poised to take full advantage.
A brief history of the changes
Introduced in 2017, the purchasing of buy-to-let property through a limited company was a move that encouraged landlords to transfer ownership of their properties for tax benefits, as well as the safety net of limited liability if things went awry.
Previously, landlords could deduct 100% of mortgage interest from rental income when paying tax. However, in 2020, the Government gradually reduced buy-to-let mortgage interest tax relief, replacing it with a 20% tax credit.
This meant many landlords – particularly those in higher tax brackets – could reduce their tax bill by starting a limited company and paying corporation tax instead of income tax.
In short, landlords who own properties individually have to pay tax on turnover, while landlords with company ownership pay corporation tax on their profits.
The benefits of limited company buy-to-lets
With so many benefits of purchasing a property through a limited company, it’s easy to see why half of all new buy-to-let mortgages were taken out by landlords with a company last year:
Tax benefits
Purchasing your buy-to-let property as a limited company could enable you to pay less tax. This is because rental income from properties owned by a limited company is subject to corporation tax, rather than income tax.
Protection of assets
When a limited company is incorporated, it becomes its own legal entity. This means that if a limited company gets into debt, the directors and shareholders of that business have limited liability, so only the money put into the company is at risk.
Property transfer ease
If you plan to transfer ownership of your rental properties to family in the future, a limited company could make this process easier.
This is because the property will remain in the ownership of the limited company, so you can utilise the simpler and more tax-efficient route of transferring the limited company ownership instead.
This also means inheritance tax, capital gains tax, and stamp duty could be avoided.
Claim back your expenses
Expenses work differently when you own your rental property through a limited company. This is because expenses such as mortgage interest are classed as business expenses for limited companies, so these could be reimbursed.
Speak to a specialist
Despite the advantages, there are some downsides, such as administration and associated costs, so landlords are always advised to weigh up the pros and cons for their individual situation, and seek professional advice when they need it.
By speaking to a specialist you are able to leverage their experience and knowledge when getting set up. In addition to this, you can access a raft of bespoke and often exclusive buy-to-let products, to ensure you are obtaining the very best rates, but also enjoying the benefits outlined above.
