It’s becoming more and more popular for landlords in the UK to buy properties through limited companies, 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.
As a result, there was an increase in special purpose vehicles companies (SPV) set up. SPV is a mortgage industry term applied to limited companies used for buy-to-let.
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 taxpayer, higher rate or additional.
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 amount that’s taxed.
On the surface that might look like a much better deal. However, tax is not that simple. That rental income your company collects belongs to your company. So, if you want to withdraw that money, you’ll have to pay more 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.
Comparison Table
Below is a comparison table which evidences the difference in tax between a company buy to let, basic rate taxpayer and a higher rate taxpayer on the same property. For the example the rental and mortgage payments were kept the same across the board.
| 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 |
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.
This guide does not and cannot cover all the different scenarios that could happen and should be used as general information only.
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.
Other Considerations
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.
If you already own a property and are thinking of changing the ownership of your property from personal name to a company, the process is subject to the same additional costs as any other property purchase including:
- Stamp Duty Land Tax
- Capital Gains Tax
- Conveyancing/Legal fees
- Early Redemption Charges (if applicable)
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.
