The pros and cons of limited company buy-to-let

Rob Oliver | Castle Trust Bank
17th September 2021
Rob Oliver
"Naturally most of the differences come down to tax treatment, but there are other things to think about"

A record number of new limited companies were set up in 2020 to hold buy-to-let properties, according to analysis of Companies House data by estate agent, Hamptons. It says that last year there were a total of 41,700 buy-to-let incorporations, an increase of 23% on 2019. The numbers have more than doubled since 2016, when tax changes for landlords were introduced and at the end of 2020 there were a total of active 228,743 buy-to-let companies.

However, a limited company structure is not for everyone, and many investors still choose to hold buy-to-let purchases in their own name. So, what are the considerations?

Here are some of the pros, cons and considerations of holding a buy-to-let investment in a limited company. Naturally most of the differences come down to tax treatment, but there are other things to think about and it’s important to seek the guidance of a specialist adviser before making a decision about what’s right for a client’s circumstances.

Pros of a limited company

Restrictions on mortgage interest relief don’t apply to a limited company

In 2015, the then chancellor George Osborne announced that mortgage interest tax relief would be gradually eradicated for individuals between 2017 and 2020. As it now stands, individual Buy to Let landlords are unable to offset any of their mortgage interest costs against their tax bill. The government has introduced a 20% tax credit for people in this position, but it is not as beneficial for higher rate tax payers. The mortgage interest payable on a buy-to-let mortgage for a limited company can still be offset against its tax bill.

Corporation tax rates are lower than income tax rates for most landlords

Profits generated by an investment property that is owned by an individual will be taxed at that individual’s personal tax bracket, which could potentially be 45%. Profits generated by an investment property that is owned by a limited company will be subject to corporation tax, which is currently 19%.

In this year’s Budget it was announced that the top rate of corporation tax will increase from April 2023 to 25%. However, it’s worth noting that the top rate will only apply on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate.

A limited company provides more varied options for tax planning

With a limited company investors can choose to draw income as and when they need it in the most tax efficient way. For example, a married couple owning an investment property through a limited company could separately reward themselves dividend payments, to maximise their tax free thresholds. There may also be more complex tax planning opportunities to meet an individual’s individual circumstances and it’s always important to speak to a specialist tax adviser.

Limited companies are separate legal entities, so they offer limited liability protection to landlords

There is a degree of comfort and separation in owning a property in a separate legal entity. For example, if tenants have unpaid utility or council tax bills, it is the limited company that will be contacted as the owner of the property, rather than the individual.

Drawbacks of a limited company

Landlords are still subject to personal tax when they take income out of the company

Corporation tax may be less than income tax, but if you want to use the money you earn from a buy-to-let investment you will need to draw money from the limited company and this may also become subject to personal tax. So an investor may be paying corporation tax through the limited company in addition to personal tax on income or dividends. Specialist tax advice should always be sought in these situations.

No Capital Gains Tax (CGT) allowance

Individuals are able to benefit from CGT allowance on profits when they sell a property. Limited companies cannot. The 2021-2022 CGT allowance is £12,300.

There are additional administration considerations and costs

A limited company is a separate legal entity, and while a company can be set up at Companies House for just £12, the company will come with a number of responsibilities, including reporting and accounting. Outsourcing these tasks will come at a cost.

Transferring an existing property from own name to a limited company is subject to costs

There are costs involved in transferring existing properties owned by an individual into a limited company. As the ownership or the property is changing it could be subject to Stamp Duty Land Tax, legal costs and potentially Capital Gains Tax. So it’s worth weighing up these costs and speaking to a specialist tax adviser before making the change.

There remain fewer products for limited companies

However, this situation is changing and many lenders, like Castle Trust Bank, offer the same rates for both individuals and limited companies.

Within its research, Hamptons provided a useful example of tax payable during the 2020/2021 tax year on a property worth £250k, with a 75% LTV mortgage for a limited company, lower rate tax payer and higher rate tax payer.

  Limited Company Personal (lower rate) Personal (higher rate)
Purchase price £250k £250k £250k
Rent  £12k £12k £12k
Mortgage interest £6,563 £4,688 £4,688
Gross profit £5,438 £7,313 £7,313
Tax due £1,033 £1,463 £3,863
Net profit £4,404 £5,850 £3,450

This calculation assumes a 75% LTV interest only mortgage with a rate of 2.5% on a property held in a personal name and 3.5% for a property held in a limited company. Gross profit is calculated after costs but before tax. Net profit is calculated after all costs, including tax.

Whichever route your clients choose depends on their individual circumstances and it’s important that they seek the guidance of a specialist property tax adviser before making a decision. You can of course discuss their options, particularly when it comes to mortgage product choice, but don’t be tempted to stray into offering tax advice if you don’t have the permissions to do so. Many broker firms find that it’s beneficial to have a referral agreement with a tax adviser, both as a way of offering additional services to their clients and of generating new business leads.

Related articles
More from Blogs
to our newsletter

Join a community of over 30,000 intermediaries and keep up-to-date with industry news and upcoming events via our newsletter.