Is Letting Properties Through a Limited Company Right For You?

Letting multiple properties through a limited company can help landlords with larger portfolios pay much less tax.

While that may be tempting, it’s important to research and understand whether incorporating a company is a good idea for you. There are potentially big benefits, but also some considerable disadvantages. 

In this guide, we explore the benefits and pitfalls of buying a buy-to-let property through your own limited company. Read on to discover if it might be a tax-efficient solution for you to pay yourself in dividends — or if the red tape of setting up a company makes it too costly to bother.

For landlords with only a few properties it might not be worthwhile. But for property investors with a larger portfolio it can make real financial sense. This article should give you a good idea of whether or not it’s worth pursuing, but it’s still vital to get good advice from your financial or tax advisor before deciding.

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How to buy property to let through a limited company

Switching to a limited company changes the way you buy new properties. But it also means a significant change is needed within your existing portfolio, the ownership of which must be transferred to the limited company.

When looking at any annual tax savings, landlords must factor in the costs of transferring properties to the business, where further tax traps await the unwary. There are also costs associated with setting up a limited company, which we cover in more detail below.

How to move existing rental properties into a limited company

Moving your property into a limited company is not a cheap or straightforward process. You must sell each property to your new company, which can generate high costs:

  • Your company must pay stamp duty for the property purchase. You need to pay the Residential rates. From April 2021, this will be 2% on the £125,000 to £250,000 bracket and 5% from £250,000 to £950,000. For a £200,000 terraced house, this will equate to £1,500. 
  • Companies must also pay the Higher Rates on Additional Dwellings. This is effectively a stamp duty surcharge charged at 3% from £0 to £125,000, and 5% from £125,000 to £250,000. That is an additional £7,500 in stamp duty for your £200,000 property. That is £9,000 in total. 
  • If the market price is higher than your original purchase price, you are personally liable to capital gains tax of 18% or 28%, depending on whether you are a basic or higher rate taxpayer. 
  • You may need to pay an early repayment fee on your existing personal buy-to-let mortgage
  • There will be finance costs associated with the company applying for and getting a buy-to-let mortgage on the property. You should also be aware that fewer buy-to-let mortgages are available to limited companies, which can make them more expensive with a higher interest rate
  • There will be associated legal fees of transferring over the properties, making changes to the land registry, etc.

You must work out the total cost of moving all your properties across to a company. Only then can you establish if any future tax savings will be enough to cover those costs.

Income Tax vs Corporation Tax

The most significant change to managing your property personally or through a limited company is ongoing tax liabilities. When you manage property personally, any profits from your enterprise will be subject to income tax. 

Over recent years, owning a buy-to-let has become less profitable because the Government has phased out a policy of allowing finance costs to be tax-deductible. Previously you could deduct mortgage interest from your rental income for tax purposes. Now you can’t. That means more of your rental income is fair game for the taxman.

For higher rate taxpayers with an extensive portfolio of buy-to-let properties, this is crucial to a limited company being a better option. A company does not pay income tax on rental incomes; it pays corporation tax on profits. With corporation tax starting at 19% the tax payable is considerably less than the 40% paid in income tax by a higher-rate tax paying landlord. A business can also deduct mortgage finance costs as a business expense.

That is not the full story, however. The whole point of managing a property portfolio is to take an income from it, and this also has tax implications. Any directors of a limited company can take a share of company profits in dividends. Dividends are more tax-efficient than income tax, but remember you pay tax on dividends on top of the corporation tax liability.

Dividend tax rates

The first £2,000 of dividends are tax-free. Thereafter, basic rate taxpayers pay 8.75% tax, and higher ratepayers face 33.75% over the £50,000 annual threshold.

With all that in mind, a landlord looking at buying a buy-to-let through a limited company should work out whether they will pay more in tax as an individual, or as a company paying corporation tax together with individual dividend tax.

Should I let through a limited company?

Here’s a basic comparison of ongoing tax responsibilities. Note that you should discuss your own circumstances with your financial advisor or accountant.

In this example, we look at a higher rate taxpayer owning eight rental properties valued at £300,000 each.

75% of it is mortgaged at 2.5% interest, they have a combined annual rent of £96,000, and the total finance costs (mortgage interest) are £45,000.

Individual taxpayer

Assuming all rental income is at the higher tax rate of 40%

  • Rental income = £96,000
  • Finance costs = £45,000
  • Gross profit = £51,000
  • Finance cost 20% tax break = £9,000
  • Income tax due at 40% of rental income minus the finance cost tax break = £29,400
  • Gross profit of £51,000 minus income tax due of £29,400

Net income for landlord is £21,600

Limited company tax liability

  • Rental income = £96,000
  • Less the business expense of finance costs = £45,000
  • New taxable gross profit = £51,000
  • Corporation tax at 19% = £9,690
  • Net profit/income for shareholder (the landlord) = £41,310
  • Dividends tax at 33.75%, with first £2,000 tax free = £13,942

Net income for landlord is £27,368

From this simple example we can see that this landlord clears almost £7,000 more each year by placing the properties through a limited company. However there are more factors in play.

A company might have further tax breaks available, and it certainly will have additional costs.

We also haven’t mentioned all the usual deductibles like building insurance, or gas safety certificates.

It’s also likely you will appoint a management agent like OpenRent to find tenants and create tenancies – more costs that will be tax deductible but to both an individual and a company.

Limited company administration and red tape

Being a director and running a limited company comes with many responsibilities. All records must be kept meticulously, and books kept up to date. You must file an annual return to Companies House together with updated memorandum and articles of association.

While all this sounds like a chore, your accountant will usually take care of it for you. There is a setup cost for launching a limited company, plus you will need to pay each year for your books to be completed, your tax return for corporation tax purposes, and your annual accounts to be filed with Companies House.

Annual accounts are more involved than your personal tax return process, so there is an extra expense and fines for late filing.

Selling properties

When it comes to selling a buy-to-let, the funds remain in the company. Even though companies don’t have to pay capital gains tax (assuming the property increased in value), any profit from the sale is subject to corporation tax.

It’s easier when an individual sells a buy-to-let. They’ll pay capital gains tax on any value uplift, but the rest is tax-free. When you are a company director, you will have to access the property sale proceeds via dividends, which are taxed. 

Regaining ownership and inheritance of properties

Perhaps you want to make one of your properties your own home. Maybe you are slimming down your portfolio, and a limited company structure no longer makes sense.

Just like there is a cost when you move property from your ownership to a company, there is a cost when you go the other way. The limited company will need to settle its finance, perhaps with a cost. You then need to arrange your own residential or buy-to-let mortgage on the property and pay any relevant stamp duty.

Inheritance planning is a subject in itself. If you die, your family will not necessarily inherit the properties you own or be able to live in them easily — especially if they are tenanted. While your beneficiaries may take on shares in the business, they will still have to go about transferring the properties into personal control if they wish to live in them.

Take Detailed Advice

The idea of moving your buy-to-let property into a limited company will appeal more to landlords with a larger portfolio. Basic examples show that running them through a company will be more tax-efficient with many properties.

For landlords with fewer than five properties, it’s likely that buying through a limited company is not the way to go.

Everyone has different needs and circumstances. Do your research and get advice from your financial or tax adviser before making a decision.

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Notable Replies

  1. Avatar for Cath2 Cath2 says:

    The other issue for me is what happens when I die because my properties are my pension so I’ve got no intention of selling them.
    As it stands at the moment, the potential capital gains tax liability is extinguished by death if you own the properties personally because inheritance tax is potentially payable.
    If they are in a limited company, that is it’s own legal entity so any potential capital gains tax remains within the company.
    On the plus side, the inheritance tax value of the company will be slightly lower because it has a tax liability on the increase in value.

  2. Swings and roundabouts

  3. i had my own company and put 21 flats into it. I had a similar number of rental units in my own name. I remember a IFA coming up with reams of papers (literally) on the benefits of company ownership to convert the rest over to the company.
    We didnt bother for several reasons. 1-lots of time 2- buying and selling duties , contracts etc 3 accounting stricter on companies 4 its really easy to start a company but when we wound up the company it took literally years and was not cheap. 5 the goverment are always changing the tax rules and if they see an advantage they often move to close that gap. (In passing i put them in the company because of IR35, something that was a damp squib) So on paper yes it looks good currently but for the hidden aspects personally i wouldnt bother. You ask yourself how much difference would it make to your quality of life and it can be a black hole converting everything over. Im not even sure all the elec and gas tests and epc’s are still valid if you change over, there are lots of things like this to consider

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This article is not intended to form legal or investment advice. Investments in property are not guaranteed and can decrease in value as well as increase.

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