This guide has been produced for information purposes only. As a mortgage broker, we're not able to offer tax advice.
There are certain benefits to buying a buy-to-let through a limited company, you just need to know how to make the most of your investment.
In this guide, we'll explain the advantages and disadvantages of buying property through a limited company, how limited company buy-to-lets differ from traditional ones, what mortgage options you have and how to set up a limited company.
A Buy-to-Let LTD Company Offers Improved Tax Efficiencies and Planning
Holding buy-to-let property in a limited company may offer some tax benefits to certain people - e.g. some higher rate taxpayers find it to be more tax-efficient than owning property as a private landlord.
You Don't Pay Income Tax on Rental Income with a Buy-to-Let LTD Company
You pay Income Tax on rental income when you own rental property in your own name as a private landlord. The rental income you receive is added to your personal income and your overall income amount determines your Income Tax band. This means that your rental income can push you over a new threshold, leaving you liable to higher taxes. You can find out more about landlord taxes in our guide: Rental Income and Other Landlord Taxes.
You Pay Corporation Tax Instead
Conversely, rental profits on properties held in a limited company are not taxed according to personal Income Tax rates. Instead, they’re charged Corporation Tax which stands at 19% (2021 - 2022); it has no upper tiers unlike those for Income Tax.
You Can Deduct Certain Expenses When You Own a Buy-to-Let Through a Limited Company
Private landlords can no longer automatically deduct finance costs - like mortgage interest - from rental income.
This is not the case for buy-to-lets owned in a limited company. You can still deduct these kinds of expenses from the income on limited company buy-to-lets as they’re considered business expenses.
Again, we recommend you speak to an accountant about the tax benefits of limited company owned buy-to-lets verses personal ownership.
You should always speak to a qualified accountant about any potential tax benefits or liabilities.
The Advantages of Buying a Buy-to-Let Property Through a Limited Company
Setting Up Is Simple and Quick
Setting up a buy-to-let company takes just 15 minutes and can be done easily online. Nonetheless, we recommend you seek advice from an accountant or legal advisor before making any big decisions. See Setting Up a Property Company for Buy-to-Let Purchases below for some extra information.
Future Planning Can Be Easier
It’s simpler to transfer a limited company to another owner than a privately held property. The property does not change owners but remains under the company’s ownership, which could protect the transaction from Stamp Duty, Inheritance Tax and Capital Gains Tax (CGT). This is useful if you plan to pass your business onto family in the future.
You Could Expand Your Portfolio Faster
Retaining profits within the company helps to protect you from tax liabilities because if you sell one of the buy-to-lets, you’re not making a “capital gain”. Instead, your business is making a profit. This could help you use more of your earnings to expand your property portfolio faster.
You Could Have a Limited Liability Company
If you own a limited liability company then you’re not personally liable for any debts held by the company, including those on buy-to-lets. However, bear in mind that you’re not absolved of the personal guarantees often required by your mortgage lender.
The Disadvantages of Buying a Property Through a Limited Company
No Capital Gains Tax Allowance
When a limited company sells a property, no Capital Gains Tax (CGT) Allowance is given. An individual who sells a buy-to-let receives a certain allowance – i.e. an amount they don’t pay CGT on. If a private landlord sold their property within the 2020 - 2021 tax year or the 2021 - 2022 tax year, they would receive an allowance of £12,300. A private landlord would pay CGT on anything above the allowance.
You don’t pay CGT on buy-to-lets owned by limited companies. Instead, you're subject to Corporation Tax when you take profit out of the business. This means you’re not entitled to the allowance. Whether it works out better for you financially depends on how much profit you gain from the sale of your buy-to-let.
The Additional Costs of Running a Limited Company
You’ll have to factor in new costs and tasks when you set up a limited company.
These costs and tasks tend to be:
- The preparation of accounts - this is a legal requirement
- Corporation Tax
- Filing at Companies House
- Legal fees
- Annual auditing - if applicable
Accountants may also charge a higher fee when preparing accounts for Companies House.
Higher Mortgage Rates
Most lenders charge slightly higher interest rates and fees to limited companies compared to individual buy-to-let mortgages.
A Reduction in the Choice of Lenders and Availability of Mortgages
Not all buy-to-let lenders offer mortgages to limited companies and those that do tend to offer somewhat smaller product ranges.
Setting Up a Property Company for Buy-to-Let Purchases
Setting up a limited company is simple. You can register with Companies House online or by post and it costs from just £12.
Here are the key things you’ll need when registering your limited company.
Company Name and Address
- You’ll need to create a unique company name - you can check it online against the current register
- The address can be your residential address
Directors and Shareholders
- You need to appoint at least one director
- You can add additional directors and/or a company secretary
- Each shareholder should be allocated a percentage share of the company
- Any shareholder with a holding greater than 25% is a Person with Significant Control (PSC)
- Each PSC’s name, month and year of birth, nationality and service address will feature on the public register
Definition of Business Activity
Some lenders require the company be defined using the following Standard Industry Classifications (SICs):
- 68100 - Buying and selling own real estate
- 68209 - Other letting and operating of owned or leased real estate
- 68320 - Management of real estate on a fee or contract basis
You should always speak to a qualified accountant about the type of company you’re creating. It’s also worth asking your tax adviser whether the company should be a Special Purpose Vehicle (SPV).
Once Your Company Is Registered
- You must register for Corporation Tax within 3 months
- You need to set up a business bank account
Running a Limited Company
Many people think that limited companies are complicated and difficult to maintain. Whilst there are a few additional responsibilities, they can be easily incorporated into your buy-to-let business plan and require little effort relative to the potential benefits. Below we’ve outlined some of the key activities involved in running a limited company.
Directors are personally responsible for some of the company’s basic functions - such as registering the business with Companies House, maintaining accounting records and making sure tax is paid on time. You can outsource these functions to other people, you just need to make sure you have adequate oversight.
Records and Accounting
It’s essential that you maintain accurate company and accounting records. You must submit a “Confirmation Statement”, previously called an “Annual Return”, each year within 14 days of the company’s anniversary of incorporation. Annual accounts and tax returns must also be submitted.
Active private limited companies need to keep records for 3 years. If you make changes to the company’s name, address, directors’ or shareholders’ structure, you will need to notify Companies House and/or HMRC.
Drawing Funds from the Company
There are several options for drawing funds from the company, including:
- Directors’ loans
The treatment of each for tax purposes is different. We always recommend you consult a qualified tax adviser as they’ll be able to guide you on the most suitable options for your circumstances.
Finance Options for Growing Your Portfolio
There are instances in which a mortgage can’t be secured on a property or it just isn’t suitable for your needs. Maybe there’s work required on it or you want to make the most of the low rate you secured previously. In these situations, you may want to consider looking at specialist finance options.
A bridging loan can act as a stopgap until a mortgage can be secured. A bridging loan is appropriate for landlords if a property is not yet habitable - e.g. it doesn’t have a working kitchen or bathroom - or it’s being bought at auction and finance needs to be arranged quickly. Please note, bridging should be viewed as a short-term solution. The bridging lender will want you to prove you have a credible plan to repay the loan before or at the end of the term.
If you’re planning to expand your portfolio by building a completely new property, renovating a dilapidated building or converting an existing one, development finance may be more suitable for you than a mortgage. We have a panel of handpicked development finance lenders, all of whom have something slightly different to offer a budding property developer. Through our network, we can construct finance packages for residential and commercial projects. We can source finance up to £25 million so no matter how large your development project is, we can find a provider willing to consider you.
Second Charge Mortgages for Portfolio Landlords
A second charge mortgage allows you to release equity in your portfolio without remortgaging, which you may want to avoid if you’ve secured a low, base rate tracking mortgage. It can be a good option if you need to do some work on an existing property or raise finance for a new one.
Tougher Criteria for Portfolio Landlords
In September 2017, the PRA (Prudential Regulatory Authority) imposed tougher underwriting standards on buy-to-let mortgage lenders. This means that landlords now come under more financial scrutiny when applying for a new mortgage on a property or remortgaging.
The changes only affect landlords with 4 or more properties. Lenders who continue working with these landlords have to demonstrate that they’ve carried out a detailed assessment of each landlord’s business plan. In doing so, lenders demonstrate that they know how that landlord is managing risk.
As part of these assessments, lenders have to “stress test” a landlord’s entire portfolio rather than just the property they’re lending against. Consequently, it can take them longer to approve mortgages for landlords and the amount landlords are able to borrow may be reduced if they can’t stand up to the scrutiny. The changes also hinder landlords from using the equity in their existing portfolio to fund further property purchases.
Limited Company Buy-to-Let Lenders
Due to all the different the buy-to-let tax changes that have been enforced since 2016, more people are purchasing buy-to-lets through limited companies. This increase in demand has resulted in an increase in the number of buy-to-let lenders that will accept applications from limited companies. The options and choices for landlords using limited companies have never been better.
Buy-to-Let Limited Company Mortgage Advice
Everyone’s circumstances are different when it comes to buying property.
The combination of our expert staff and whole of market approach allows us to offer impartial advice and support for landlords. We’ll guide you through the finance options available step-by-step.
We also have access to a range of other trusted partnerships with professionals, such as insurers and solictors. With the hard work of these partners and our staff, you'll receive a service that goes beyond the process from application to ownership. One that works around your needs and helps you protect your investments - so you can keep growing your portfolio.