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At UK Landlord Tax we often get asked by clients whether or not they should buy their rental property via a limited company instead of in their own personal name. The main driver for this conversation has been the introduction of the restriction for higher rate taxpayers when allowing mortgage interest as a deductible expense which is commonly known as Section 24.
It is important to realise that it was the intention of the government for higher rate taxpayers to contribute more in tax than their basic rate taxpayer counterparts when they brought in the Section 24 interest restrictions. One of the stated reasons for this is that the government wants private landlords who cannot afford to let out properties to sell these properties in order for more properties to be available to those looking to get on the property ladder.
In this article, we will explore the pros and cons of owning your rental property via a limited company which may help you determine whether a limited company is the best structure for your future acquisitions.
Below is a comprehensive list of the potential benefits of purchasing your rental property via a Limited Company.
1. The potential tax saving of buying your rental property via a Limited Company
When landlords are looking at maximising their rental yield the number one item of expenditure that they will need to consider is the amount of tax that they will need to pay to HM Revenue and Customs on their profits.
If the properties are owned personally the rental profits will be taxed at your marginal rate of tax. The rate of Income Tax will therefore depend on what profits you earn from the property as well as all of your other income for that tax year.
What does this mean for you?
You will need to add the profits from this rental property to all of your other rental income for the year including salary, dividends and other investment income including the rental profits from any other properties owned personally to arrive at your gross income for the year.
The first £12,570 is covered by your tax-free personal allowance and the remainder of this gross income will be taxed at the rates based on the below table:
| Tax Band | Income | Tax Rate |
| Basic Rate | £12,501 to £50,000 | 20% |
| Higher Rate | £50,001 to £150,000 | 40% |
| Additional Rate | over £150,000 | 45% |
If the properties are owned via a Limited Company instead of in your personal name, the profits will be subject to Corporation Tax and not Income Tax. The current rate of Corporation Tax is 19%. From April 2023, if the profits of the Limited Company exceed £250,000 the rate of Corporation Tax will increase to 25% and if the amount of profits is between £50,000 and £250,000 the rate of tax will be between 19% and 25% and the exact rate will be calculated according to the profit made for that year.
There can therefore be significant tax savings for higher and additional rate taxpayers who would be paying 40% and 45% on these profits if the properties were owned personally in comparison to 19% in the Limited Company.
2. Tax planning opportunities
As a Director of a Limited Company, you can have trivial benefits of up to £300 per year tax-free from your Limited Company. This is not possible for landlords who own their rental property personally.
More importantly, if it is envisaged that the properties will be held for long-term investments it will be possible to structure the Limited Company to provide succession planning to ensure that the properties are passed to the children in the most tax-efficient manner by mitigating the Inheritance Tax that would otherwise be applicable on the death of the landlord.
This is discussed in more detail in our Family Investment Company brochure which can be downloaded for free from our website so we will not be covering this in more detail here.
3. Mortgage Interest relief
Whilst this is number 3 on our list, for many clients, this is the primary reason they start the conversation with us regarding whether or not they should acquire their rental property via a Limited Company.
As discussed above, since the introduction of the Section 24 rules in 2017, for higher rate and additional rate taxpayers it is now no longer possible to have mortgage interest allowable as a deduction in full against the rental profits if the property is owned personally. Instead, you will receive a tax credit equivalent to 20% of any interest paid.
However, there is no such restriction for Limited Company regardless of whether the Directors and Shareholders are themselves higher rate or additional rate taxpayers. The mortgage interest expense is therefore allowed in full for Limited Companies when calculating the profits on which Corporation Tax will be payable on. This is a significant advantage for Limited Companies in comparison to owning the properties personally but only if you are a higher rate or additional rate taxpayer.
4. Limited Liability
For some landlords, one of the reasons they decide to purchase property via a Limited Company is due to the limited liability you have if something goes wrong.
The financial liability cannot extend to you personally for any debts owed by the Limited Company other than in certain circumstances.
If however, the lender obtains a personal guarantee when you purchase a property via a Limited Company it is important to note that if the mortgage is not paid they can come after your personal assets if after selling the property there are not enough funds to pay the remaining mortgage owed to the lender.
Below is a comprehensive list of the potential drawbacks of purchasing your rental property via a Limited Company and why this may not be right for you.
1. Mortgages in a Limited Company
As a rule of thumb, the mortgage rate you obtain in a Limited Company could be higher than the equivalent mortgage you would obtain on the same property in your personal name. At the time of writing this article, the additional interest is from ½% to 1% more in a limited company.
Even after paying this additional interest, it is still usually more tax efficient to purchase the property via a Limited Company for a higher rate and additional rate taxpayers although this will depend on the mortgage rates being offered.
As a Director of the Limited Company, you may be asked by some lenders to provide a personal guarantee before they provide lending to the Limited Company.
2. Further taxes are payable if you withdraw money from the Limited Company
If you need to withdraw money from the Limited Company for your own personal use this will need to be paid to you as dividends.
The first £2,000 of dividends will be covered by your dividend allowance per shareholder and so can be withdrawn tax-free.
Any amounts over and above the dividend allowance will be subject to tax at the marginal rate for you depending on your tax band. Below is a summary of the applicable rates that will apply.
| Tax Band | The tax rate on dividends above the allowance |
| Basic Rate | 8.755% |
| Higher Rate | 33.75% |
| Additional Rate | 39.35% |
For those landlords who can afford to leave the rental profits in the limited company, they will not need to suffer this second layer of tax and so will achieve maximum tax efficiency. The funds can be withdrawn in the future when the landlord had reduced income for example upon retirement and this can lead to further tax efficiencies.
A spouse can be added as a shareholder to provide further tax efficiency depending on the income of the spouse.
If all of the rental profits are required to supplement your lifestyle or pay for personal expenditures, then we will need to calculate what tax savings can be achieved by the Limited Company in comparison to the property being purchased in the landlord’s sole name.
Whether or not you should buy a rental property via a Limited Company will depend on your personal circumstances.
At UK Landlord Tax we have the expertise and experience to be able to discuss this with you so that you can decide whether or not this is the best solution for you in order to maximise your yield on your rental property and pay the least amount of tax possible.
If you don’t have a tax adviser yet who handles all of your landlord-related tax queries then please feel free to get in touch on 0800 907 8633, via tax@fixedfeetr.com or via our online contact form.
If you found this article informative then why not read our closely related article on residence nil rate band 2021/22 or our guide to buy to let costs?
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Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG
UKLandlordTax.co.uk is the trading name of Thandi Nicholls Ltd Accountants Registered Office: Creative Industries Centre, Glaisher Drive, Wolverhampton WV10 9TG.
Registered in England. Company Number 7319439. Director S S Thandi BA
