Pros and cons of buy to let through a limited company
- Published: Monday 20 July, 2015
- Category: Landlord tax
- By: Ben Gosling
- Updated: Wednesday 07 September, 2016
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.
For some landlords, buying property through a limited company might be a more tax-efficient option than investing as an individual. Find out about the pros and cons of limited company buy-to-let.
Please note that the article that follows is for guidance and information purposes only. For tax advice, always approach a qualified accountant or financial advisor.
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Buying buy-to-let property through a limited company begins with setting up and registering a company. Often, but not always, the company will be a special purpose vehicle (SPV).
An SPV is distinct from a trading limited company in that it carries out a single niche activity. In the case of a property business, that activity will be buying, holding and selling buy-to-let real estate.
A limited company must have at least one director and one shareholder, which can be the same person.
The company is a separate legal entity to the individual who set it up. The company will be listed at the Land Registry as the legal owner of the property, and will appear on rental contracts as the landlord.
Otherwise, landlords can use their limited company to manage property much as they would if they were operating as a private individual. They can buy one property or several, refurbish, let or sell properties, and instruct letting agents and other professionals to perform services on the company’s behalf.
Limited companies can claim full tax relief on buy-to-let mortgage interest
Between 2017 and 2020, tax relief for buy to let finance costs will be phased out and replaced with a flat 20% reduction.
This will mean that many landlords will pay more tax on the rental income they receive. But as limited companies pay corporation tax on income, rather than income tax, the changes will not affect them. This might make them advantageous from a tax perspective.
Profits retained in the company do not attract income tax
Companies pay corporation tax on trading profits. At present, the corporation tax rate is 20%. This will fall to 18% on April 1 2020.
Income tax and NICs may be payable on any income that directors withdraw from the company as salary. Shareholders may also pay income tax on dividends (more on this below). But it is not payable on profits retained within the company. This means that there will be more cash to re-invest, allowing limited companies to grow their portfolios more quickly.
Dividends allow business owners to exercise more control over their income
All assets and finances belong to a company rather than its owners. This allows directors and shareholders owners to exercise more control over how much money they take from the company.
One way to withdraw money is through dividends. All taxpayers have a £5,000 tax-free dividend allowance, after which they pay tax according to their income tax band:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers
You can also take money out of a company through a director’s salary, deductible expenses and a director’s loan.
It is possible to reduce tax exposure when transferring ownership
Because assets are listed in the company’s name, changing ownership can be made easier by transferring shares. Transferring ownership within the company in this way can circumvent the need to pay tax on sale profits.
This could also make it easier to gift assets to family members that are involved in the company. Be wary that doing this could give rise to inheritance tax implications. A professional tax advisor will be able to offer guidance.
Running a limited company entails additional costs
Managing a property business through a limited company requires more administration, which has associated costs. This includes (but is not limited to) account preparations, auditing, company registration and legal costs. Accountants may also charge more for their services to limited companies.
Not all buy-to-let lenders offer mortgages to limited companies
Limited companies have access to a smaller range of lenders and products than individual borrowers. As a result, mortgage set-up fees and interest rates tend to be more expensive for limited company borrowers.
Lenders may also impose additional restrictions. Some insist, for instance, that the director owns a majority share of at least 80% in the company. (This makes asset transfers, as described above, more difficult.)
On balance, lenders prefer applications from SPVs. Mortgages for SPVs are easier to underwrite as there is a clear relationship between assets and reliabilities. But some lenders will also consider applications from trading limited companies.
Limited company prospects improving
In recent months, the number of buy-to-let mortgage applications from limited companies has risen.
Lenders are responding to increased demand by improving their specialist ranges. Products for limited companies are becoming cheaper and more widespread. Commercial Trust’s data shows that in the first half of 2016, the number of mortgages available for limited companies rose by 44%. The average interest rate for limited company products fell by 0.20 percentage points.
Nevertheless, limited company lending remains a specialist activity. This makes the role of a professional buy-to-let advisor all the more crucial in sourcing mortgage products for limited company clients.
Owners may be personally liable if their business encounters difficulty
Limited companies are so named because their shareholders have limited liability. This means that their responsibility for company debts is limited to the value of the shares that they own.
But lenders will usually ask the company’s directors and shareholders to sign personal guarantees, making them liable if their rental business falls into financial difficulty. This effectively removes the advantage that limited liability affords a company’s owners.
Limited companies are not always more tax-efficient
Corporation tax is not subject to a personal allowance like income tax. Typically, the higher the rental profits, the greater the tax savings of corporation tax versus income tax.
Limited companies also pay corporation tax when selling properties, rather than capital gains tax (CGT). The corporation tax rate is lower than the 28% CGT rate for higher rate taxpayers, but companies do not benefit from the CGT allowance that individuals have.
Speak to an accountancy professional to determine whether buying property through a limited company is the most tax-efficient option for you.
Transferring an existing portfolio to a limited company structure can be more complex and costly than buying a new property through the company.
HMRC treats transfers between an individual and a company as arm’s-length transactions and taxes them as such. Thus, the individual will usually pay CGT, and the company will usually pay stamp duty on the acquisition.
Whether these extra costs are justified will depend on your individual circumstances and goals. There are pros and cons to every strategy, and what works for one investor may not work for another.
Commercial Trust’s aim is to provide a broad view of the options and to help match our clients with the most suitable mortgage product. For advice on tax and financial planning, be sure to consult with a professional accountant or financial advisor.
A qualified accountant can help set up a limited company. You need:
A company name
A company cannot have a name that:
- Includes a ‘sensitive’ expression or word
- Implies or suggests a government or local authority connection
- Is offensive
More guidance on naming a limited company can be found here: Incorporation and names.
A company name cannot be the same as or similar to an existing company’s. Companies House keeps a register of limited companies, which landlords can search to see if there is already a company with the name they are planning to use.
Search the Companies House register
A company address
This must be a physical address located in the same country in which the company is registered. Landlords may use their own address, or that of the individual who will manage their corporation tax, if it meets these requirements.
The company address will be publicly available to view on the Companies House register.
At least one director
The company director must be at least 16 years of age and not disqualified from running a limited company for any reason. Directors’ names and addresses appear publicly on the Companies House register.
Find out more about a director’s responsibilities on Gov.uk
At least one shareholder
Shareholders own a company’s capital, and therefore also the company.
There is no limit to the number of shareholders a company may have, and shareholders can also be directors. In fact, it can be a requirement of a mortgage agreement between a buy to let lender and a limited company that the director is also the majority shareholder.
A statement of capital
This statement details the number and type of shares a company has and its total share capital, the names and addresses of all shareholders, and prescribed particulars about the shares, including:
- What share of dividends the shareholders receive
- Whether shares can be redeemed for money
- What company matters , if any, shareholders may vote on, and how many votes they get
A memorandum of association
This is a precisely worded legal statement that is signed by all of the initial shareholders to state that they agree to form the company.
A template memorandum of association is available on the government website.
Articles of association
Articles of association detail the rules directors must follow when running their company. Model articles for companies limited by shares are available on the government website.
Company owners can write their own articles of association, but they will be unable to register their company online if they do so.
If a company is limited by shares (rather than public or limited by guarantee), uses the model articles of association provided by the government, and does not have a name that contains one or more words that require permission to use, it can be registered online. Registration costs £15, and usually takes around 24 hours.
The paper form IN01 must be used to register companies that are public, limited by guarantee or use their own articles of association. Using the paper form costs £40, and the application process typically takes between eight and ten days. (There is also a same day service that costs £100.)
In addition to the paper form, IN01 continuation pages are available if the individual registering the company needs to provide more information.
Using an agent
There are a number of company formation agents who are authorised to register companies with Companies House on an individual’s behalf.
As well as registering the company, these agents offer guidance on the company formation process, assistance with naming the company, help setting up a business bank account and ongoing secretarial support for the company.
A list of authorised company formation agents is available on the government website.
Using third-party software
Specialist software exists that allows users to register companies with Companies House. Some software also includes a secretarial feature, allowing users to register changes of company details and electronically file important documents, such as annual returns.
A list of authorised third-party software can be found on the government website.
Registering for corporation tax
After a company is registered with Companies House, HMRC will send a Unique Taxpayer Reference (UTR) to the address at which the company is registered. The UTR is required to register for corporation tax, which a company must do within three months of commencing trading.
HMRC will require the following information:
- The company’s name, registered number and main trading address
- The names and addresses of the company’s directors
- The start date of the company’s first accounting period
- The date to which annual accounts will be made up
- The nature of the business the company conducts
- The name and registered address of any parent company, if applicable
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.