Buy To Let through limited company or personal name
Should you purchase a buy-to-let property investment in your personal name or in a property investment limited company?
You will pay a different rate of tax on rental income personally compared to if you purchase buy to let as a limited company.
This article will review the most tax efficient ways to buy property to maximise rental income while minimising tax.
What are the basics of Buy To Let through limited company or personal name?
Since 2017 there has been an increase in the number of landlords purchasing buy-to-let property in a limited company rather than personally.
The reduction in the amount of tax relief available for interest on buy-to-let mortgages proved to be the catalyst for the move from personally held property investment to using a limited company.
The tax was previously due on the net rental income after allowable expenses had been deducted, including mortgage interest.
One of the main reasons for the growth in limited buy-to-let property ownership is the different tax treatment since the Summer budget of 2017.
A limited company pays corporation tax, while an individual landlord personally pays income tax.
The borrower sets up a limited company or property special purpose vehicle (SPV) which is purely for the purpose of owning property.
The borrower then deposits funds into the limited company and arranges lending to it which allows the company to purchase the property.
Limited company buy-to-lets are not the best situation for every property investor.
Buy-to-let investment comes with multiple advantages, whether the property purchase takes place through an SPV or personally by the landlord.
If you decide to buy-to-let property as a limited company, there are additional factors to consider.
The tax on rental income will always be a primary consideration in either setup.
Whether you decide to buy property personally or through a limited company, it is advisable to research the tax position of each and ascertain the level of rental income before making a decision.
What are the disadvantages of purchasing buy to let as a limited company?
When a limited company sells a property, no Capital Gains Tax (CGT) allowance is given.
An individual property investor who sells a buy-to-let personally receives an allowance they don’t pay CGT on.
The tax allowance for properties sold personally in the 2022-23 tax year is £12,300.
A private landlord pays CGT on anything above this.
As a limited company, you instead pay corporation tax with no tax-free allowance.
This can work for or against a property investor, depending on how much profit is gained from the sale of each buy-to-let.
Another disadvantage of using a limited company is the running costs involved.
Some of the running costs include the preparation of accounts, the paperwork around payments of corporation tax, filing at Companies House, legal fees and annual auditing.
Accountancy fees may also be higher when preparing accounts for Companies House.
Most lenders charge higher interest rates and fees to limited companies compared to individual buy-to-let mortgages.
Not all buy-to-let lenders offer mortgages to limited companies and those that do tend to offer smaller product ranges.
Purchasing buy-to-let as a limited company may not be the best structure for you as a sole trader landlord with one or two rental properties from which you derive income.
Decide which structure is best for you personally and ensure that you get professional tax advice early on.
What are the tax differences between personally owned and company owned buy to let property?
Tax on any personally owned buy-to-let property is quite simple: you deduct allowable expenses from your rental income to arrive at the profit.
You pay income tax at your normal rate.
You can’t claim your mortgage interest as an expense on personally owned properties.
Instead, you receive a basic rate (20%) reduction from your tax liability for any mortgage interest payments or other financing costs.
This means that any landlords in the higher and additional tax rates pay more tax personally.
Tax on properties via a limited company is more flexible.
You deduct the allowable expenses from the rental income to ascertain company profits.
The entire mortgage interest payment is tax allowable and will also reduce the profit, thus decreasing the tax amount due.
You then pay corporation tax rather than income tax on the profits.
Or you can keep the profit inside the limited company and use it to purchase another buy-to-let thus reducing your tax liability.
If you wish to take the profit out of a limited company and pay yourself personally, there are three main ways: salaries, dividends, and pension payments.
Each one is subject to different tax treatment.
Operating buy-to-let as a limited company can provide an excellent rental income with favourable tax rates.
What are the benefits of purchasing buy to let property personally?
While buying a property in a limited company is more tax efficient than buying personally, there are other costs that determine how much profit you will make.
The mortgage will usually be your highest cost personally, so it makes sense to keep it as low as possible.
Mortgage interest rates for personal borrowers can be less than 2%, while limited companies can pay up to 3.5% on average.
As a private landlord, your income is readily available to you personally in your bank account and fully accessible.
This is not the case for a limited company.
As a limited company shareholder, you can only take money out as dividends.
If you’re also the director of your company, you can pay yourself a salary lower than your taxable allowance to access your money regularly while remaining tax efficient.
If you already personally own a buy-to-let property and think of moving it to a limited company, the only way to transfer property ownership is by a sale and repurchase transaction.
This incurs further costs including CGT, stamp duty and other legal and mortgage fees.
Limited companies also have running costs that you do not personally pay as an individual investor.
It is often the case that landlords with multiple buy-to-let properties (four or more) operate through a limited company.
Buy-to-let in personal name can also provide you with more mainstream lenders, with more competitive rates.
Fewer checks are completed personally, so the lender arrangement fees tend to be less.
Rental income is only subject to income tax whereas a limited company has corporation tax to pay before dividends and directors’ salaries.
The inclusion of a lower rate taxpayer can also reduce the tax bill for you personally rather than through a limited company structure.
The tax due on rental income remains a significant factor when deciding to buy property personally.