Forming a limited company as a buy to let landlord

When is it ok to form a limited company for your buy to let business and when is it not?

A recent report by estate agent Hamptons showed that a record number of new limited companies have been set up by landlords in 2021, revealing a 23% increase compared to the previous year.

Why? When a landlord buys a property through a limited company, they are able to benefit from more attractive tax rates, and this has led to a greater increase in this practice over the last year.

But it’s not appropriate in all circumstances and you’ll need to proceed with caution. Here we explore the subject on a deeper level to ensure any decisions you make are well informed.

What is a buy to let limited company?

A buy to let limited company is a company you can use to buy investment properties through a limited company instead of in your own name. Some may refer to this as a Special Purpose Vehicle ‘SPV’.

The same rules apply for a buy to let limited company as a usual limited company, with business owners having to submit regular accounts to Companies House. These include:

  • Annual accounts
  • Confirmation statement.
  • Corporation tax return (CT600)
  • VAT returns
  • Employer (PAYE) returns

Buying a property through a limited company is more cost effective in terms of tax for some landlords, as the laws on buy to let taxation have made investing in property more expensive. For example, mortgage interest costs can no longer be reclaimed in full by landlords who own residential properties in their personal name. Additionally, landlords can no longer claim the 10% wear & tear allowance.

How does a buy to let limited company work?

When you invest in property some landlords choose to get a buy to let mortgage, which is usually in their name.

If you choose the alternative route and set up a buy to let limited company, the company owns the properties rather than the individual, and the mortgage is taken out in the company’s name.

The landlord would pay money into the small business set up and this money would be used for a deposit for purchasing the properties. The remaining monies would then be covered by a limited company buy to let mortgage.

In order to get the mortgage, the limited company has to be set up before the mortgage begins but the limited company does not have to be trading for a certain amount of time.

What are the benefits of setting up a limited company for buy-to-let?

Setting up a limited company for a buy to let property has many benefits, for example it allows landlords to continue to offset their mortgage interest against their profits.

A buy to let limited company also means a landlord’s profits are subject to Corporation Tax rather than individual tax, meaning they’re taxed at a rate of 19 percent rather than a greater rate for individuals. Companies can also claim mortgage interest as a business expense, but they still usually have to pay stamp duty on a limited company buy to let.

Within a corporate structure like a limited company, there is an opportunity to pay a tax efficient salary and dividends, through tax benefits. The first £2,000 of dividend income for each recipient is taxable at 0% – this rule isn’t available for those who aren’t set up as a limited company.

These are just a few of the incentives for landlords to choose a limited company structure, and others include:

  • Tax relief for all interest paid
  • Keeping personal finances separate
  • Income that has accumulated in the company can be distributed after retirement
  • If ownership is to be passed or shared between family members, share capital offers greater flexibility than real property
  • Limited companies have a separate legal status and are considered as separate legal entities, offering limited liability protection to landlords
  • When using a limited company, landlords can also consider the option of selling the company instead of the property. Stamp duty on shares is 0.5%, making it a better option for those looking to buy
  • For landlords planning to pass their business to family members, succession planning is a lot easier with limited companies than an individually owned.

What are the disadvantages of a buy to let limited company?

As with any tax planning, there are some disadvantages to explore. These should be considered by landlords when choosing which is the best option for their personal circumstances:

  • If a landlord were to transfer an existing property to a buy to let limited company, they would be subject to capital gains tax and stamp duty tax. The stamp duty land tax would be based on the market value of the property being transferred.
  • Once the limited buy to let company is set up, the company will need to file an Annual Tax on Enveloped Dwellings (ATED) return, though this is only if the value of the property is above £500,000.
  • Once the landlord has used the tax-free dividend allowance of £2,000, the dividends will then be subject to the landlord’s marginal rate of tax, which could anywhere between 32.5% or 38.1%.
  • The number of lenders willing to provide a mortgage for a buy to let limited company is lower and the mortgage interest rates tend to be higher. Of course, this is likely to change once the market begins to change and adapt this newer way of acquiring property, but currently this demand does not reflect the behaviour of the lending market.
  • There are also additional administration costs required to manage a company, which will result in additional compliance costs and overheads.

Whether a landlord chooses a buy to let limited company or not completely depends on their personal circumstances, properties acquired and what they plan to do in the future with the portfolio.

As always, we’re on hand to advise on the best tax planning route taking into consideration your circumstances. Contact us today if you require support.