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

Updated on 11 February 2019 | 4 Comments

Limited company buy-to-let is on the rise, but experts have warned transferring your portfolio to a company wrapper could actually leave you worse off.

It’s been a rough few years for landlords.

The pantomime villains of the property market have taken kicking after kicking from the Government, from being walloped with a 3% Stamp Duty surcharge to seeing various tax reliefs stripped back and even being enlisted in the fight against illegal immigration.

However, one shining light for landlords appears to be the limited company buy-to-let, where their properties are owned by a company set up by the landlord, rather than by the landlord as an individual.

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.

The growth of limited company buy-to-let

Buying an investment property via a limited company, rather than as an individual, has become enormously popular in recent months.

According to Countrywide, one in five rental properties are now owned by a corporate landlord, the highest proportion since records began in 2010.

It’s become even more pronounced in the capital - more than a quarter of rental homes in London are owned by company landlords.

And according to specialist broker Mortgages for Business, a massive 77% of applications for buy-to-let mortgages in the first quarter of the year had been made through limited companies.

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 and is moving towards 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. 

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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.

According to financial information site Moneyfacts, just 14 lenders are currently active in the limited company buy-to-let sector, though the number of products on offer from those lenders has jumped significantly.

In March there were 288 limited company buy-to-let deals to choose from, an increase of 136% year-on-year.

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.

David Sheppard, managing director of mortgage broker Perception Finance, emphasised that whether the limited company route will save you money depends on your portfolio.

He said: "It's crucial that you do your sums before committing to switching over to owning your investment properties through a limited company, as the costs or benefits will vary depending on your circumstances."

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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.

Landlord? Read these guides!

How to slash buy-to-let costs

How to spot a dodgy tenant



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