Purchase Buy To Lets through limited company or personal name
Should you purchase a buy to let property investment in your personal name or through an investment limited company?
You will pay a different rate of tax on rental income personally compared to if you purchase in an LTD.
This article will review the most efficient ways to purchase property to maximise rental income while minimising tax.
Please use this online calculator to determine whether purchasing inside a UK LTD is right for you.
Personal name vs. company ownership of rental buy-to-let: Which saves you the most money?
If you are an American buying UK property, be sure to check out our Expat Tax website.
What are the basics?
Since 2017, the number of landlords buying Buy-to-lets in a limited company (LTD) rather than personally has increased due to the Section 24 mortgage interest relief cap.
The reduction in the amount of relief available for mortgage interest proved to be the catalyst for the move from owning name-held property investments to using an LTD.
The borrower sets up a Special Purpose Vehicle (SPV) to own property.
The borrower then deposits funds into the LTD and arranges lending to it, which allows the entity to purchase the property.
Investment offers multiple advantages, whether it is purchased through an SPV or personally by the landlord.
The tax on rental income will always be a primary consideration in either setup.
It is advisable to research each tax position and ascertain the level of rental income before making a decision. A property investment company may be good for some but not others.
Whether to invest in buy-to-let through a limited company or personal name depends on your income, future plans, and how you want to manage profits. For many investors, a limited company for property rental offers tax efficiency, better inheritance planning, and flexibility.
Others may benefit more from the simplicity of personal ownership. Still unsure? Contact our team at Optimise for bespoke advice on the best way to buy property through limited company or personally.
What are the disadvantages of purchasing buy to let property as an LTD?
No Capital Gains Tax (CGT) allowance is given when a limited company sells a property.
An individual investor who sells a buy-to-let personally receives an allowance they don’t pay CGT.
The CGT allowance for residential properties in the 2023-4 tax year is £3,000. A private landlord pays CGT on anything above this.
As an LTD, you pay corporation tax with no personal allowance (free).
This can work for or against a property investor, depending on the profit the investor gains from the sale.
Another disadvantage of using an LTD is the running costs involved.
Some of the running costs include account preparation, paperwork related to corporation tax payments, 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 than to individuals.
Not all lenders offer mortgages to limited companies that offer smaller product ranges.
Purchasing through 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 and ensure that you get professional advice early on.
Limited company for buy to let or rental property
Many landlords choose to invest using a limited company for buy to let due to the full mortgage interest relief and favourable corporation tax rates.
A limited company for rental property can also help with long-term succession planning, reduced exposure to higher personal tax bands, and more structured income distribution.
If you’re considering a limited company for property investment, it’s essential to weigh up ongoing admin costs and lender restrictions.
Buy to let personal or limited company – which is better?
Buying property in your own name may be suitable if you’re a basic-rate taxpayer or prefer simplicity. But as your portfolio grows, many investors question whether buy to let personal or limited company makes more sense. A personal approach gives access to CGT allowances, but rising income could trigger tax inefficiencies. We explore the real tax differences between limited company vs personal buy to let so you can make an informed choice.
What are the differences between personally owned and an LTD?
Tax on any buy-to-let property in your own name is quite simple: you deduct allowable expenses from your rental income to arrive at the profit.
You can’t claim your mortgage interest as an expense on personally owned properties. You now receive a basic rate (20%) reduction from your tax liability for any mortgage interest payments or other financing costs.
This means that any landlords with higher and additional bands pay more tax.
You deduct the allowable expenses from the rental income to ascertain company profits.
The entire mortgage interest payment is allowable and will also reduce the profit, thus decreasing the tax amount due.
If you wish to pay yourself, there are three main ways: salaries, dividends, and pension payments. Landlords can use a property investment company to take advantage of the tax benefits.
Owning a house in a LTD can offer potential advantages, such as paying corporation tax on profits, which is typically lower than higher rates of personal income tax. However, any profits withdrawn from the company will be subject to dividend tax. Individual ownership means rental income is taxed at your income rate, which can be higher.
Mortgage options for companies are generally restricted, and interest rates might be higher compared to mortgages. However, lenders are increasingly offering products for companies as this option becomes more popular among landlords.
A LTD requires more administration, including annual accounts, corporation CT600 returns, and compliance with Companies House regulations. Personal ownership involves less administrative work but requires managing rental income and expenses.
Individual ownership can be simpler and more straightforward, with fewer administrative responsibilities. It also allows for greater flexibility in accessing rental income directly without needing to go through the processes of paying dividends.
Using a company can be beneficial for IHT planning, as shares in the LTD can be transferred to heirs. Individual ownership might lead to higher IHT liabilities, although there are various reliefs and planning strategies available.
