Structuring Your Buy-to-Let Investments Tax-Efficiently

Written on 17 July 2018 by Robyn Clark

Structuring Your Buy-to-Let Investments Tax-Efficiently

Following the Buy-to-Let PRA changes to landlords’ tax relief introduced last year, many investors are now considering structuring their investment portfolios into Limited Companies. There are some potential advantages and drawbacks to this approach and below we will briefly outline some of the these.


Higher Tax Relief

It can be argued that this is probably one of the main reasons for the growth in Limited Company Buy-to-Let applications. This is because the amount that higher rate tax payers who personally own Buy to Let properties can deduct from their mortgage interest and associated costs on their investment properties will be gradually decreased from a maximum of 45% to 20% by 2020. This change has not affected Limited Companies, instead they are required to pay Corporation Tax, currently 18%, which in April 2019 will be reducing further to 17%.

Tax-Free Annual Dividends Under £2,000

No tax is charged on annual Limited Company dividends under £2,000, allowing you to receive tax-free income from your investment properties up to this amount. This flexibility allows directors with the help of the accountants to time dividend pay-outs for maximum tax-efficiency, distribute them to relatives/friends on basic tax rates or leave the property’s profit within the company to reinvest further.

No Income Tax When Reinvesting

Limited Companies are not required to pay income tax on the retained profit of their Buy-to-Let investments. This could allow faster growth of your Buy-to-Let portfolio, as potentially more profit be available within the company to invest in additional properties.

Capital Can Be Withdrawn from the Company

Personal funds invested into the Limited Company can be drawn back out from the company in the form of a ‘director’s loan’. This gives investors considering creating a Limited Company the peace of mind that any money they contribute towards the company will be able to be reimbursed if needed.

Favourable Stress Testing

Lenders may have a more relaxed approach to stress testing for a Limited Company compared to a rental property in a personal name. For an individually owned investment property, rental income must cover 145% of the mortgage payments stressed at 5.5%. However, lenders may reduce this to 125% when lending to a Limited Company.

Possibly More Options for Inheritance Tax

You should always seek advice from a qualified tax specialist before making any changes but holding property within a Limited Company may give you more options when it comes to planning for inheritance tax, including trust structures and different share types.  


Less and More Expensive Mortgage Options

Many lenders do not provide Limited Company mortgages, so there is a much more restricted range of mortgage products available compared to those offered to individuals. With the recent growth in Limited Company investments the range of products for Limited Companies is rapidly increasing, however these options still tend to have higher rates and fees than personal Buy-to-Let mortgages.  

Hefty Tax on Annual Dividends Over £2,000

As a higher rate taxpayer, you can be taxed heavily If you plan on taking out more than £2,000 in annual dividends. Higher rate payers will be required to pay 32.5% and additional rate taxpayers will need to pay 38.1% on this dividend income. If you are looking to draw out your profits rather than reinvest them then you will need to talk your finances through with an accountant to work out which option is the most tax efficient for your circumstances.

Additional Overhead Costs

Setting up and running a Limited Company can come with a host of additional expenses, including higher accountant and legal fees, HMRC tax calculations and annual auditing. The additional time and hassle it takes to set up a Limited Company may be enough to deter busy individuals with an intense work schedule.

Higher Transfer Costs

Transferring existing individually-owned property investments into a Limited Company can be a complex and costly process. It requires the Limited Company to repurchase the property from the individual, leaving the company director liable for paying both the Capital Gains and Stamp Duty Taxes associated with the transaction. It you already own investment properties under your individual name you will have to work out if transferring your existing properties into a Limited Company will be tax efficient for you. We recommend that you speak with your accountant or tax specialist before putting the transfer in place

No Tax Allowance When Selling

Individuals selling a property benefit from a Capital Gains tax-free allowance of £11,700 (2018/2019). This is not the case with Limited Companies, who are instead subject to Corporation Tax and not eligible for tax allowances.

There are both advantages and disadvantages to using a Limited Company to purchase your Buy-to-Let investments and whether this is the right decision for you depends entirely on your individual circumstances. It won’t be for everyone, as such it’s important to get tax advice from a tax specialist before arranging the finance. If you think this may be the right choice for you, John Charcol have over 40 years’ experience arranging Limited Company Buy-to-Let mortgages. To discuss your options further with one of our expert enquire now or call us on 0330 433 2927.

Categories: Buy-to-Let Mortgages, Tax, Robyn Clark

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