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

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

Record 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 18 January 2024

Record numbers of landlords are setting up businesses through which to invest in properties.

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.

The latest data from Hamptons shows that 50,004 limited companies were set up by landlords last year, a new record high, surpassing the previous record of 48,520 in 2022.

This is particularly notable given the decline in purchase activity among landlords generally last year.

According to Hamptons the total value of outstanding buy-to-let mortgages dropped by 3% last year, yet the number of mortgages held in limited companies grew by 10% over the same period.

This trend has had a substantial impact on the number of investment properties owned through limited companies in recent years.

Buy-to-let companies now own a total of 615,077 properties, a jump of 82% from 2016 when tax changes were first announced which made limited companies a more attractive option.

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, with corporation tax for profits at 25%.

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 £1,000, with the tax you have to pay varying depending on your own tax band.

This has been stripped back from £2,000 last year, and will again be trimmed to £500 next year.

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

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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