Limited company buy-to-let: is this switch a mistake for landlords?

Limited company buy-to-let: is this switch a mistake for landlords?

Large numbers of landlords are opting to purchase through limited companies. Here's what you need to consider when working out if it’s the right option for you.

John Fitzsimons

Mortgages and Home

John Fitzsimons
Updated on 31 October 2022

The way that people invest in property in recent years has changed substantially.

There was a time when the majority of those who purchased a buy-to-let property did so in their own name, perhaps as a means of topping up their own pension saving or building a portfolio which they could pass onto loved ones down the line.

However, a host of changes to the way that buy-to-let is taxed and regulated has seen a growth in the number of investors purchasing property through a limited company instead.

In fact, new data from Hamptons shows that in the year to September, more than 50,000 new businesses were set up with the specific intention of holding property.

While that’s slightly down on the 51,299 set up in the previous 12 months, it remains significantly above any other previous year.

The Hamptons data shows that there are now a record 300,000 active property-holding businesses, with the number having doubled since 2017.

So what’s driving this rise? And what are the potential downsides to be aware of?

This article is part of a wider series on investing, covering all areas from stocks and shares to buy-to-let, peer-to-peer and alternative investments. Click here to view the full guide.

Why landlords are attracted to limited company buy-to-let

Landlords who are higher or additional rate taxpayers used to be able to claim back tax relief on their mortgage interest payments at their income tax band.

In other words, if they paid 45% income tax on their usual earnings, they could claim back 45% of the money they spent on their mortgage interest payments.

The Government has changed this now though, with landlords only being able to claim back 20% - the basic tax rate - on their buy-to-let mortgage interest.

Things work slightly differently if the investment property is owned via a company wrapper though.

For starters, the mortgage interest is viewed as a business expense, and so reduces the total amount of taxable profit.

As businesses pay tax on their profits, in contrast to individuals who pay tax on income, this could work out better for the investor.

On top of that, you also have the fact that corporation tax for profits right now is 19%, so lower than income tax rates. Of course, that won’t be the case for long ‒ corporation tax is due to increase to 25% from April 2023.

Is it as good as it looks?

However, accountants RSM have flagged up the fact that landlords opting for this route may actually be exposing themselves to a greater tax bill.

For starters, if you are moving ownership from an individual to a corporate structure, then the taxman will view that as a sale and purchase.

That means you’ll have to fork out capital gains tax at 28%, as well as having to stump up another batch of Stamp Duty. That could be a seriously significant expense.

There are also added expenses to consider with your borrowing.

While limited company buy-to-let is on the increase, it remains a relatively niche area of the market; not all lenders are active here, and those that are, generally charge a higher interest rate on company buy-to-let than traditional buy-to-let.

And then you need to consider how you’re going to be paid. If you own the property as an individual, the rent goes straight into your bank account.

But if you own it via a company, then the rent goes into the business – are you going to take it as a dividend?

Currently, the tax-free allowance on dividends stands at £2,000, with the tax you have to pay varying depending on your own tax band.

Finally, don’t forget the admin costs associated with setting up a company and having to file accounts.

Search for a cheaper buy-to-let mortgage deal today

The professionalisation of buy-to-let

The various steps taken by the Government in recent years appear to be aimed at professionalising the landlord sector – the days of most landlords owning only one or two investment properties appear to be on the way out.

Professional landlords are more likely to own their investment properties through limited companies, and are generally set up to better cover the added expenses that can accompany buying in this fashion.

But for the small-time landlord, it’s crucial to do your sums before jumping into switching to a limited company structure.

It is far from guaranteed that doing so will save you cash - it could easily end up costing you more.

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