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Is Limited company status advisable for buy-to-let landlords?

August 2, 2017


By Louise Misiewicz

Are you worried about tax changes on your property business?

What can you do to protect your buy-to-let portfolio?

A long-standing client popped into our office last week, to discuss the benefits of changing his property business structure to a Limited company setup, as he was concerned about tax changes for landlords.

We sat down and had a coffee, looking at the pros and cons of setting up a property business as a Limited company entity. I also pointed him to this recent article I wrote, covering typical questions that many buy-to-let landlord clients usually have about the tax and wealth planning benefits of Limited companies.

How can buy-to-let landlords navigate property legislation?

The conversation I had with my buy-to-let landlord client was pertinent, as recent industry news has highlighted that under certain legislation, property investors might be worse off under a Limited company setup for their property businesses.

Some property industry commentators have suggested that buy-to-let landlords using a Limited company could be over £1,000 a year worse off due to higher mortgage costs overall in the UK.

A Limited company borrower, for example, would pay around 3.4% for a two-year fixed rate 75% LTV mortgage deal, whilst a personal borrower would be paying around 1.9% under current lending limits.

Property landlords investing through a Limited company are excluded from recent tax changes: this means that the amount of finance costs higher rate taxpayers can deduct from their rental income before calculating their tax bill is being gradually phased out. The restriction will be complete from April 2020 as shown in our previous article

For many buy-to-let landlords, including the client I spoke to, the higher cost of limited company mortgage borrowing outweighs any tax advantages of running his property business in this way.

Current industry analysis highlights that landlords with multiple properties (ideally, more than four properties in their portfolio) benefit most from a Limited company structure.

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I advised my buy-to-let landlord that if he was looking to repurchase existing homes within his property portfolio into a Limited company, he could lose out on tax reduction benefits, as this move would trigger capital gains and stamp duty taxes.

I believe it’s more cost-effective for new property landlords purchasing one investment property to do so as an individual, rather than through a Limited company.

Limited company landlords can subtract mortgage interest costs from their rental income before calculating their corporation tax. Even when paying income tax on a regular salary in addition to corporation tax, Limited company borrowers will have a reduced tax bill.

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What should property investors do about business structure?

Having less to pay in tax eventually outweighs higher mortgage costs, but this is typically achieved once four or more properties are purchased.

I did suggest to my client that landlords who already have a number of buy to let properties, one option is to repurchase into a Limited company structure.

However, this incurs two major tax bills: capital gains and stamp duty, making it an inadvisable move for landlords with a small number of properties who do not have much to gain from being in a Limited company. Larger landlords could be better off remaining as personal investors.

Invest through a Limited company is an important area, as more buy-to-let landlords look for ways to offset recent tax changes. But landlords shouldn’t rush into this, assuming it’s a safe bet for saving money.

Each property investor’s situation is different, and there’s no single solution.

I have written a number of useful articles for property investors around Limited companies, including:

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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk