Buy-to-let: are landlords really better off using a limited company?
Posted on 8th February 2019
Is it more tax efficient to buy-to-let through a limited company?
For buy-to-let (BTL) owners, it’s been an unpredictable couple of years since the Government introduced controversial new tax relief rules in April 2017.
Up until April 2017, all landlords paid income tax based on their net rental income (after deducting the allowable expenses including mortgage interest). For landlords paying either higher or additional rate income tax, 40% and 45% respectively, tax relief could be claimed at their highest rate.
By April 2020, the new taxation rules will have completed the phasing in process, and, regardless of whatever tax rate the landlord pays, tax relief will only be possible to claim back at the basic rate of income tax, which currently stands at 20%.
This means that landlords who pay income tax at a higher rate will end up having to pay an increased tax bill on their BTL properties.
What does it mean to have a limited company own your BTL property?
Since a limited company is recognised under law as being a separate entity from its owner, it pays corporation tax rather than income tax. Corporation tax is currently paid at 19% of the company’s profits. Individuals pay income tax at different rates varying from 20% to 45%, depending on level of income. From 1st April 2020, corporation tax is set to reduce to 17% of the company’s profits.
Although the amount of tax relief accessible to individual landlords is being cut back, limited companies will be able to offset 100% of any mortgage interest charges. This means that it can often work out more tax efficient to buy-to-let through a limited company.
While this seems like a no-brainer, the cost, time and effort associated with running a limited company can overshadow the benefits associated with the tax side of things. Your solicitor and conveyancer, for example, may charge you more because they are having to deal with the further work involved with dealing with the limited company in addition to yourself. For this reason, it is important to take advice and ensure your personal situation is considered.
It is certainly not a one-size-fits-all tactic, though.
Every current or prospective landlord’s situation is different, and depends on a number of factors, including how many properties you hold, how long you intend on retaining the property or properties for, and how quickly you need the income from letting. Your tax position, from the point of view of both an income tax and a capital gains tax perspective, is also something to consider.
Tax savings are certainly not guaranteed when buying to let under a limited company, either. When you sell a property there is no capital gains tax allowance, and if you end up needing to withdraw money from the company, you might even have to pay dividend tax.
Furthermore, the mortgage market for this side of BTL is still relatively small, although it has recently been growing in popularity, though steadily. You are more likely benefit from much better mortgage rates as an individual buying a BTL property, over a limited company.
I’m a landlord who already owns a property as an individual. Can I transfer it to a limited company, and what are the implications?
It is absolutely possible to transfer ownership of your property or properties from your name to a limited company. This will, however, activate a sale and, of course, the repurchase by the limited company.
You will also incur capital gains tax, stamp duty, and all the extra legal and valuation fees. You will ultimately, however, benefit from the tax-deductible expenses including mortgage broker fees and lender arrangement fees.
The work surrounding this can potentially be very complicated, and you would need to work with an experienced buy-to-let mortgage broker if you choose to go down this route.
We can advise whether we think you will benefit from transferring your personally-owned property to a limited company and explain the implications of doing so.
I'm looking to purchase my first buy-to-let. Should I buy it personally, or through a limited company?
As with all accountancy advice, each individual's situation is different. We would need to look at a number of variables including the amount of properties you intend to buy, the length of time you will be retaining them for, the mortgage rates offered to you as both an individual and through a limited company, and many other components.
As with any large financial purchase, you should seek professional advice tailored to your own situation before making an important investment decision.
How will Brexit affect my decision?
In short, nobody knows.
It’s true that the mortgage market has remained resilient despite the ever-increasing uncertainty surrounding Britain’s relationship with the European Union, but it truly is anybody’s guess as to what might happen next. It does appear, however, that the increasingly popular use of limited companies for buying BTL properties will probably continue to grow, despite these changeable times.
It should be noted that the Government may well attempt to reduce the appeal of limited company mortgage lending by equalising the tax treatment of both individual and limited company BTL owners. On the other hand, the chance of this happening is relatively low for now, because of the implications it could have on wider company law. However, if the Government doesn’t achieve its objectives by introducing this tax change, it could happen.
So, how do I decide what to do?
If you do not immediately require the income from the property or properties for current expenditure, the limited company route could be an intelligent decision to make.
Generally, holding the property or properties long-term is likely to be somewhat beneficial if you do decide to go down the limited company route, but of course this depends on many more factors.
Book a call or email us today for bespoke advice, tailored to your own individual circumstances. Whether you are new to buy-to-let as an income opportunity, or an experienced landlord looking to explore your options, we will explain your choices in simple, understandable terms, and help you come to an informed decision based on your own particular situation.
Written by:
Nicola J Sorrell -
Effective Accounting
Founder | Xero Champion | IR35 Expert
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