Limited Company Buy To Let Pros & Cons

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Why Should you Consider Buying Your Property Through a Limited Company Buy to Let?

It has become popular for landlords in the UK to buy properties through a limited company buy to let, rather than in their personal names. Why?

Because the government’s announcement in 2017 to phase out mortgage interest relief payments meant landlords could end up paying more in tax than before. If you buy your property as an individual, then your rental income will get taxed as personal income.

Before 2017, landlords paid less tax on their rental income, because they could deduct the cost of mortgage interest from their gross profits. But since April 2020, you must pay tax on your total rental income. You now receive a tax-credit, based on 20% of your mortgage interest payments. As a result, higher and additional rate taxpayers were hit with higher tax affecting profits, whereas basic tax rate payers were not affected. This has led to an increase in special purpose vehicles companies (SPV) being created. SPV is a mortgage industry term applied to limited companies used for buy to let.

What is a Limited Company Buy to Let?

A limited company buy to let mortgage, also known as a Special Purpose Vehicle (SPV) mortgage, is a buy to let mortgage taken out in the name of a company. You can use it to purchase a property to hold in your company’s name.

The main benefits of getting a buy to let property in this way are tax related: you pay corporation tax rather than personal income tax on any rental earnings and profits, but there are other pros and cons of this approach too.

Is It Better to Purchase Through a Limited Company Buy to Let?

Whether you’re buying your first investment property, or are an established private landlord, the tax benefits of mortgaging your property through a limited company can be significant.

There are many considerations to keep in mind when deciding whether to purchase in your personal name or ltd company. Company buy to let mortgages generally come with slightly higher interest rates than personal buy to let mortgages. The difference has reduced as time has gone on and the popularity of this type of mortgage has increased, but they are still higher. You also need to consider your current income and how increasing this with rental income could affect your tax implications.

What do I Pay if I Take the Buy to Let out in my Personal Name?

This would depend on whether you are a basic rate, higher rate or additional rate taxpayer. Currently all landlords will receive a 20% tax credit based of the mortgage interest paid for the year. For example, if you had paid £5000 in mortgage interest for the year you would receive a tax credit of £1000 to take away from the tax owed. Tax is calculated off your total rental income received. This is charged at either 20%, 40% or 45% depending on your tax bracket. There are some allowable expenses which can be taken off but crucially mortgage interest can no longer be used as an expense. The new rules only affect higher and additional rate taxpayers as basic rate taxpayers end up paying the same tax regardless.

What do I Pay if I Use a Company Buy to Let?

If you’re buying a property as a company, your company pays 19% corporation tax on the rental income. Plus, companies can also claim mortgage interest as a business expense, which reduces the income subject to tax. On the surface that might look like a much better deal. However, tax is not that simple. The rental income your company collects belongs to your company. So, if you want to withdraw that money, you’ll have to pay tax to do it. There are two main ways you can pay yourself from your company:

  • Pay yourself in dividends. You get £2,000 worth of dividends tax free each year. After that, you’ll pay tax on those dividends (at 8.75%, 33.75%, or 39.35%, depending on your income tax rate).
  • Pay yourself a salary, as an employee of the company. 

Speak to an Expert!

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Contact us today for expert advice and guidance on your unique mortgage and property needs. We will work with you on a one-on-one to basis to help you find the right solution for your needs.  

With our experience you can rest assured that you are in good hands when it comes to securing the financing you need for your property.

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Comparison Table

The below table explains what tax you would pay in different scenarios including, a company buy to let, basic rate taxpayer and a higher rate taxpayer.

Company Buy To Let Basic Rate Taxpayer Higher Rate Taxpayer
Rental Income per year £11,400.00 Rental Income per year £11,400.00 Rental Income per year £11,400.00
Assumed Mortgage Interest per year: £7,200.00 Assumed Mortgage Interest per year: £7,200.00 Assumed Mortgage Interest per year: £7,200.00
Taxable Profit Calculation: £11,400.00 – £7,200.00 = £4,200.00 Taxable Profit Calculation: £11,400.00 x 20% = £2,280.00 Taxable Profit Calculation: £11,400.00 x 40% = £4,560.00
Tax Credit = Not Applicable Tax Credit: £7,200.00 x 20% = £1,440.00 Tax Credit: £7,200.00 x 20% = £1,440.00
Corporation Tax Due: £4,200.00 x 19% = £714.00 Tax Due: £2,280.00 – £1,440.00 = £840.00 Tax Due: £4,560.00 – £1,440.00 = £3,120.00

This table does not and cannot cover all the different scenarios that could happen and should be used as general information only.

Basic rate taxpayers only need to worry about the extra 40% tax rate once earnings surpass £50,271. If their earnings are below the threshold, they won’t be classed as a higher-rate taxpayer. However, if your buy-to-let investment acts as additional income to your main job, you could find yourself pushed into the higher tax bracket as all your earnings are taxed together, no matter where they come from.

We always recommend speaking to a tax adviser, accountant or financial adviser before deciding on which route to take. They are experts in their fields and will be able to take your personal circumstances into consideration before advising.

Selling the Property

If you’ve bought the property in your personal name, you’ll pay capital gains tax on any profit you earn from selling your property. Capital gains tax is either 18% or 28%, depending on your circumstances.

Companies don’t pay capital gains tax; they’re charged the regular corporation tax rate on any profit earned from selling a property. The corporation tax rate is 19%. As a company, there is no tax-free allowance, however you can use indexation allowance to reduce the amount of tax owed.

Just like with rental income, you’ll have to pay tax to withdraw the funds from your company after selling. Once again we would always recommends speaking to a tax expert so they can assess your personal circumstances and recommend a suitable solution.

Do I Pay Stamp Duty When Incorporating my Properties Into a Limited Company?

Yes, incorporating a property portfolio is a legal transfer of ownership from an individual to a separate entity (the limited company) and this will trigger stamp duty and capital gains tax charges.

For some landlords, these additional costs prevent them from being able to move to a limited company investment structure. On the other hand, the long-term savings can mitigate these initial costs; it completely depends on your circumstances.

A qualified tax advisor can help you work out if this would benefit you or not.

What’s your next step?

Like most things in life, whether you buy as an individual landlord or a company really depends both on your circumstances, and on what you’re looking to get out of a buy-to-let. Always talk to your accountant or financial adviser to help you make the best choice for you. It will always depend on your unique situation.

Once you’ve got professional advice and know what you’re after, we’ll help you get the right mortgage.