Should I buy rental property through a limited company?

Apr 8, 2021

We won’t sit on the fence here: in most cases, for higher-rate taxpayers, buying rental properties through a limited company does make sense.

It offers full tax relief on mortgage interest, access to lower rates of tax and more flexibility.

It also puts your property business on a firmly professional footing, which can be helpful when it comes to persuading investors and lenders.

But every individual case is different and it’s always worth taking advice – especially as the UK Government keeps making changes that mean the decision gets a little harder each year.

The glory days

A few years ago, getting a buy-to-let mortgage was beautifully tax-efficient for residential landlords.

It allowed them to deduct mortgage interest and finance costs from taxable rental income before paying tax, saving thousands of pounds in the process.

That was, as you might imagine, a significant incentive to get into property even if you’d never considered it before. That was especially true in the context of plummeting interest rates worldwide in the wake of the 2008 financial crisis, which made property an attractive alternative to traditional savings vehicles.

This rattled the Government which sought to rein in the buy-to-let market by, first, introducing a 3% stamp duty surcharge on the purchase of additional properties.

Then, secondly, it decided to reduce the amount of relief available on mortgage interest. From April 2017, mortgage interest relief fell by 25% per year before being replaced by a basic-rate (20%) tax credit from April 2020.

This hit sole traders and partners in the higher (40%) or additional-rate (45%) income tax bands worst – and drove an increase in property investors incorporating their landlord businesses.

By 2019, it was being reported that the majority of buy-to-let purchasers, regardless of the size of their portfolios, were purchasing through limited companies.

Why set up a limited company?

It’s simple, really: limited companies can offset all of their mortgage interest against profits from rental income.

They then pay corporation tax at 19% (on the first £50,000 of profits only from 1 April 2023 provided that you do not control any other companies) which represents a massive saving compared to the typical marginal rates of 40% or 45% for sole traders or partnerships.

A limited company also gives you a considerable amount of flexibility in how you extract profit from your property business. A blend of salary, dividends and directors’ loan repayment is most common these days, to retain access to the state pension and other benefits while keeping personal income tax to a minimum.

And in property, as in every other sector, the limited personal liability that incorporation brings has its advantages. As a director, if the company gets into trouble, your personal assets, such as the family home, won’t be at risk as they might be if you are a sole trader.

It sounds like a no-brainer, and for most of our clients, this will be the route to go down once you start buying-to-let in earnest.

So why the note of caution?

Why you might choose not incorporate

Before we get into property-specific issues, there are some general things about limited companies to bear in mind.

First, while they reduce your personal liability, they come with a load of new responsibilities and statutory requirements, including:

  • preparing and filing articles of association
  • registering with Companies House
  • filing Companies Act compliant accounts
  • maintaining company records
  • reporting any changes, such as a change of registered address
  • completing a corporation tax return.
  • you cannot draw money from the company unless you have a credit balance on your director’s loan account, you have voted salary or dividends.

Though all that bureaucracy takes time and effort, it shouldn’t be a deal-breaker. It’s routine stuff, ultimately, which we can handle on your behalf, or at the very least advise you on.

Directors of limited companies do have to publish their names and addresses. Some people simply don’t like doing this, especially if property is something they’re doing alongside a separate career.

With property in mind, another issue is the availability of buy-to-let mortgages for limited companies. There are limited company mortgages out there, but they’re unlikely to have the same generous terms as those for individuals.

In most cases, the tax savings more than cover any additional mortgage costs, so it’s still worth doing – but this is the main reason why you need to pause, think carefully and let us run some calculations on your behalf.

Transferring ownership in and out of the company

Here’s another big issue to consider: if you already own the properties and you want to transfer them to your new limited company, you could get stung by capital gains tax (CGT) and stamp duty land tax (SDLT).

That’s because you, the individual, have to formally sell the property to your company at a fair market price. So you, the individual, might be liable for CGT while the company has to pay SDLT.

The tax saving may still make this worthwhile, especially in the long run, so, again, you need to do some careful planning before making a decision.

In general, though, it’s best to form a limited company before you acquire property, sidestepping the CGT issue, at least.

Non-residents and UK limited companies

If you’re based overseas and looking to invest in UK property, the decision requires even more thought.

A limited company won’t mitigate the 2% SDLT surcharge for non-residents, unfortunately. This comes into effect from 1 April 2021 and is designed to tax  foreign ownership of investment in UK property more so than in the past.

You might also find it that bit harder again to get a competitive mortgage from a UK lender.

To talk through your property purchasing options and the tax implications of how you approach it, get in touch on 0800 907 8633, via tax@fixedfeetr.com or online.

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