Buying a Buy-to-Let Property through a Limited Company

Buying a buy-to-let (BTL) property through a limited company has gained traction among BTL investors. With potential tax efficiencies, this strategy can be appealing. However, it also comes with some complexities that need to be understood before making a decision. This guide explores some advantages and considerations, and the steps involved in buying a property through a limited company.  

Advantages:

Buying a BTL property through a limited company is often motivated by the potential for tax savings.

1. Mortgage Interest Relief:

Since the phased reduction of mortgage interest relief for individual landlords was completed in 2020, buying property through a limited company has become even more attractive. Companies can still deduct mortgage interest fully from rental income for tax purposes, whereas individual landlords can only get a tax credit for 20% of interest and that, too, only at the basic rate of income tax of 20%.

2. Corporation Tax:

When you buy a BTL property as an individual, the taxable profit from rental income is subject to personal income tax rates. These can be as high as 45% on incomes above a certain threshold. However, when a property is purchased through a limited company, the taxable profit from rental income is subject to corporation tax rates, which are 19% for profits below £50,000 and 25% for profits over £250,000. For profits between £50,000 and £250,000, the company may be able to claim “marginal relief”, which provides for a gradual increase in the corporation tax rate between the small profits rate of 19% and the main rate of 25%.

Considerations

Despite the advantages, buying a property through a limited company is not without its difficulties.

1. Limited Mortgage Options:

Securing a mortgage through a limited company is often more challenging and expensive. Many lenders require the company to be a Special Purpose Vehicle (SPV) specifically set up for property investment. Interest rates on limited company mortgages also tend to be higher than those offered to individual owners.

Many lenders typically also require directors of the limited company to provide personal guarantees. This means that even though the property is owned by the company, the directors may still be personally liable if the company defaults on the mortgage. This requirement can negate some of the liability protection that comes with a limited company structure​.

2. Profit Extraction:

While corporation tax on profits is lower than income tax, any dividends you take out from the company are subject to dividend tax, which can reduce the overall tax efficiency​. The dividend allowance for personal income tax calculation purposes is only £500. On dividends above this amount, depending on your income tax band, you could face a higher rate of  33.75% or even an additional rate of 39.35%.

3. Additional Costs and Complexity:

Setting up and maintaining a limited company also comes with additional costs and administrative burdens. You will need to file annual returns, annual accounts and annual corporation tax returns, and possibly also monthly VAT returns if your turnover exceeds a certain threshold.

Steps to Buying a Property Through a Limited Company

If you decide that buying a property through a limited company is the right strategy for you, here are some of the key steps:

1. Set Up a Limited Company:

The first step is to incorporate a limited company through Companies House. You will need to choose a company name, appoint directors and issue shares. It may be advisable to set up the company as an SPV if the sole purpose is BTL property investment​.

2. Open a Business Bank Account:

Once the company is set up, you will need to open a business bank account to keep the company’s finances separate from your personal finances. This is crucial for both legal and tax purposes.

3. Secure Financing:

Unless you expect to rely solely on equity capital raised through the issue of shares, you will need to find a suitable mortgage lender. Many lenders offer BTL mortgages specifically for limited companies, but these often come with higher interest rates and stricter lending criteria. If your limited company owns multiple properties, you might qualify for a portfolio mortgage. This type of mortgage is designed for companies with multiple investment properties, allowing them to manage all properties under a single mortgage agreement. Portfolio mortgages can offer more flexibility and potentially better rates. In any event, Directors should be prepared to offer personal guarantees.

4. Find and Purchase BTL Property:

Once your financing is in place, start searching for a property. Work with an estate agent or property specialist who understands the nuances of buying property through a limited company. Completing the property purchase and mortgage formalities will require engaging the services of a solicitor or conveyancer.

5. Manage the Property:

After purchasing the property, you will need to manage it as you would any other BTL investment. This includes finding and managing tenants, maintaining the property, and ensuring you comply with all relevant legal and regulatory requirements​.

6. Plan an Exit Strategy:

It is important to have a plan for repayment of the mortgage, whether you plan to sell the property or other investments, or raise additional equity capital. ​

Conclusion

Buying a property through a limited company is a strategy that can offer significant tax savings, but it is not without its challenges. Higher mortgage rates, increased administrative burdens and the complexity of profit extraction are important factors to consider. Consulting with a financial advisor or property specialist can provide valuable insights tailored to your specific circumstances.

FAQs

Q.  Is it more tax efficient to buy property through a limited company?

A. Companies can still fully deduct mortgage interest from their rental income for tax purposes, whereas individual landlords can only get a tax credit of 20% of interest at the basic rate of income tax of 20%.

When you buy a BTL property as an individual, the taxable profit from rental income is subject to personal income tax rates, which can be as high as 45% on incomes above a certain threshold. However, when a property is purchased through a limited company, the taxable profit from rental income is subject to corporation tax rates, which are 19% for profits below £50,000 and 25% for profits over £250,000. For profits between £50,000 and £250,000, the company may be able to claim “marginal relief”, which provides for a gradual increase in the corporation tax rate between the small profits rate of 19% and the main rate of 25%.

Q.  Can I get a mortgage through a limited company?

A. You can get a mortgage through a limited company, but it may come with higher interest rates and stricter lending criteria. Most lenders require the company to be a Special Purpose Vehicle set up specifically for property investment. Personal guarantees from directors are often required and there are fewer lenders offering these types of mortgages compared to personal BTL mortgages​.

Q.  What are the costs associated with setting up and running a limited company for property investment?

A. Setting up and maintaining a limited company comes with additional costs and administrative burdens. You will need to file annual returns, annual accounts and annual corporation tax returns, and possibly also monthly VAT returns if your turnover exceeds a certain threshold.

Q.  Can I transfer a property I already own into a limited company?

A. You can transfer a property you own personally into a limited company, but it will be treated as a sale at its current fair market value. This means that your company as the buyer needs to have the capital and may have to pay Stamp Duty Land Tax and transaction costs, and you as the seller may have to pay Capital Gains Tax and transaction costs.

Q.  What are the risks of buying property through a limited company?

A. The risks include higher mortgage costs, limited lender options and potential challenges in profit extraction, such as paying additional tax on dividends. Additionally, there are ongoing administrative and compliance responsibilities, and in some cases, personal guarantees may put your personal assets at risk if the company defaults on its mortgage​ payments.