If you are planning to enter the buy-to-let market or you are already a fully-fledged landlord, you may be considering purchasing property through a limited company. If so, you are not alone. Buying property through a limited company has been increasingly popular in recent years due to changes in mortgage tax relief and a growing understanding of how to reduce liabilities. While setting up a company to purchase property may not necessarily be the best option for everyone, for many people, this now makes strong business and financial sense. Before making the decision to purchase through a company, it is essential that you take the time to understand both the pros and cons of doing so, the process of buying property through a limited company, and the key considerations to bear in mind.
What are the main reasons to buy a property through a limited company?
If you own property personally as a landlord, all aspects of the ownership are in your name, including the liability to repay any mortgage you have taken out to fund the purchase, the property deeds will be in your name, and any tax owing on the profits will be payable by you. However, if a property is placed into the legal ownership of a limited company, the company is liable for the property and any tax owing on the profits made through its rental.
The number one reason to consider buying your next property through a limited company or to move your existing property into the ownership of a limited company is the potentially large saving in tax. There are two main tax benefits you may be able to realise:
- The tax liability on any profits made can be reduced
- Any future inheritance tax may be reduced
In terms of personal tax liability, buy to let landlords in the higher tax bracket can find themselves paying between 40 and 45%. By purchasing through a limited company, this can be reduced to the company tax rate (currently 19%). This can represent a substantial tax saving each year. This model can be used whether you own Houses in Multiple Occupation (HMO), buy to let properties or even holiday lets.
While considerable advantages are possible, before making the commitment to purchase through or transfer property to a limited company, it is advisable to speak to a specialist in accounting and company formation. They will take the time to understand your current property portfolio (whether you are a new or highly experienced landlord) and recommend a strategy that takes into account your future plans, including inheritance and estate planning considerations.
Another benefit is that because the property will be in the ownership of a limited liability company, you will not be personally held liable for any losses made. This means that any creditors of the limited company cannot access your personal assets in the event that liabilities cannot be paid. That said, this may not be the case if a personal guarantee is required by a mortgage lender.
Can’t I just offset my tax liability through mortgage tax relief?
In past years it was possible to reduce your personal tax bill by using mortgage tax relief. For some, this could equate to up to 45% of any interest paid on mortgages, loans – including loans to buy furnishings, and overdrafts on the property owned. This meant, for example, that if the amount you owed in mortgage interest equated to £9,000 each year, you could deduct this amount from your rental income and only pay tax on the remaining amount based on the tax bracket you were in. This was gradually phased out by the government between 2017 and 2020, meaning that 0% of finance costs are now deductible from rental income.
To replace this outgoing model, a new buy-to-let tax system was introduced which allows landlords to claim a 20% tax credit on the total amount of loan interest paid. For example, if £9,000 mortgage interest is payable in a year, a tax credit of £1,800 can be claimed. As such, while this new system may not result in higher tax bills for those in the lower tax bracket, for those in the 40% or 45% tax brackets, the liability is potentially much higher. This is because the tax relief available only covers 20% of their loan/mortgage interest payment rather than the full amount.
It is also important to bear in mind that even if you are in the lower tax bracket, any earning from your property if personally owned, must be declared to HMRC and hence may increase your tax bracket.
What are the downsides of buying property through a limited company?
While the tax savings you can achieve can be considerable, it is always important to weigh up the downsides of this method of property ownership, as follows:
- By owning a limited company, you will have to meet the compulsory filing requirements stipulated by Companies House. The documents you need to file will depend on the size of your business, including whether you are classed as a small business or micro-entity (in either case, the requirements are reduced). Not only will you need to file the required accounts and other documents, but you may also need to pay someone to prepare these for you. Your filing obligations will include:
- preparing and filing the company’s articles of association
- registering with Companies House
- preparing and filing annual financial accounts
- maintaining your company records
- reporting changes to Companies House
- completing a corporation tax return each yea
- You will need to pay personal tax on any salary or dividends paid to you by the business.
- It can be harder to find lenders when purchasing property through a limited company. You may be required to enter into a personal guarantee, and it is likely that the interest rate you pay will be higher for a limited company compared to a buy-to-let purchaser.
- If you already own investment properties and these would need to be transferred into the ownership of the limited company, it may be that capital gains tax (CGT) will be owed on any rise in value realised since the initial purchase. In addition, stamp duty will also be payable on the purchase of the property by the company. CGT is currently 28% for any gains made on residential property for higher rate taxpayers.
- If you need to transfer property from your ownership to that of a limited company, you may be liable to pay early repayment fees (this will depend on the terms of your existing mortgage).
To work out the potential costs and financial benefits given your situation and existing portfolio, speak to an accountant and company formation specialist who will be able to estimate this for you.
Registering a limited company
When registering your company, you will need to decide on a company name, registered address and nominate at least one director and one shareholder. If more than one person is involved in the business, you will also need to decide on the shareholding, bearing in mind that the larger the shareholding, the greater say over the business. You will need to advise Companies House of anyone who will have a greater than 25% shareholding (as they will be classed as a person with significant control).
When forming your company, it is important to register the correct entity type (i.e. a special purpose vehicle – SPV). An SPV is a normal limited company used for a single purpose – i.e. for the purchase and rental of property. In many cases, mortgage lenders will require that you place properties on which they are lending into an SPV to keep them separate from other commercial business interests. The appropriate standard industrial classification (SIC) code for your model of business must also be used; these include:
68100: Buying and selling of own real estate
68201: Renting and operating of Housing Association real estate
68209: Other letting and operating of own or leased real estate
68320: Management of real estate on a fee or contract basis
If you are unsure which to use, speak to an accountant specialising in company formations.
You will also need to set up a bank account for the company and register with HMRC once you have started trading.
Placing your buy to let, HMO, or holiday lets into the ownership of a limited company can confer significant benefits, but the costs, overheads, and disadvantages should be taken into account as they don’t make sense for everyone. If you are unsure of the best approach, speak to a specialist in commercial law, accounting, and company formation before you proceed to determine the best strategy for your property portfolio and future plans.
Uniwide Formations specialises in the registration of limited companies and LLPs. As professional business service providers, we offer a wide range of related services and can advise you on all aspects of the formation of a limited company for the purchase of rental properties. To discuss any of the points raised in this article, you are welcome to contact us.