A limited company or personal buy to let - the right choice

One of the important decisions UK landlords have to make is whether they should invest in buy to let through limited company or personal name.

This became a focus for consideration when tax laws changed. The changes meant that, for some investors (especially higher rate taxpayers) their personal income tax bill became more expensive.

The change in tax laws meant you could no longer take all the interest you paid on your buy to let mortgage off the amount you received in rent when calculating your profits. So, you had to pay tax on the full amount of your rental income, save for a 20% tax credit.

This article looks at the differences between investing in buy to let through limited company or personal name that you should consider.

Please be aware this guide is for information only and if you are unsure of your tax position you will need to seek advice from a tax professional.

Why own a buy to let as an individual?

When weighing up what to do with any savings you have, there are a number of options to consider, e.g. investing in stocks and shares, taking out long-term or short-terms savings accounts, putting money into a pension. Another option is to invest in property.

So, why would you invest in property? Well there are two ways you could make money from a rental property:

1. Profits from rental income, after deducting costs and taxes
2. Any capital appreciation (growth in the value) in the property over time

Making money from rental property is a long-term strategy. This is especially true when it comes to any increase in the value of your property, because property values go up and down when there are fluctuations in the economy, but over periods of several years, typically prices go up eventually.

Rent is charged monthly, so income from rent is over a shorter time-frame, but you typically need a reserve of funds for unexpected costs (e.g. repairs to fixtures and fittings, replacement of a boiler or of white goods) and to pay monthly mortgage costs (if applicable), fees to third parties (e.g. letting agent, accountant) and tax on income.

The advantages of owning buy to let property in personal name centre around the following things, which are typically true of this investment path:

• Greater choice of buy to let mortgage rates
• Lower buy to let mortgage rates
• Lower lender arrangement fees

Why purchase a buy to let through a limited company?

Landlords may opt to buy rental property through a limited company, if it proves to be the more profitable option for them than buying in personal name.

The reason it may be more profitable relates to tax. Tax laws relating to property investment were changed in 2017. In each tax year following, until 2020/21, the amount of tax relief on mortgage interest was gradually reduced, until it was removed entirely. It was replaced by a 20% tax credit.

This meant that landlords were taxed on the full years’ rental income, rather than just the profit that remained after deducting what they paid in mortgage interest.

Not all landlords are affected by the current tax position in the same way. This is why it is essential to get professional tax advice, if you are unclear yourself on whether it is the right route for you.

A mortgage advisor can outline the differences between the mortgage interest rates you can get in personal name, compared to those available to you via a limited company, buy they cannot give you tax advice on which route will be the best option for you. This is why separate tax and mortgage advice is necessary.

The costs involved

Costs when buying via a limited company

When you buy property via a limited company, the following costs apply:

• Tax advice on whether setting up a limited company is right for your circumstances (if required).
• Legal advice on how to set up a limited company (if required).
• Costs of registering the limited company on the Company’s House website.
• Ongoing tax accounting may be necessary to help you maintain your tax affairs.
• Conveyancing fees will apply for the legal work involved in buying the property.
• Stamp duty land tax with a 3% surcharge (or the equivalent in Scotland and Wales) is paid on all limited company property purchases, irrespective of whether the company has bought a property before or not. Use our stamp duty calculator to work out how much stamp duty you will pay.
• Letting agent fees may apply if you appoint an agent to manage your tenancy, or undertake isolated elements of the work in finding a tenant at/around the time of the purchase.

If you are mortgaging the property, then the costs of the mortgage will apply. Lender arrangement fees and mortgage interest rates are typically higher, when investing through a limited company than they are when buying in personal name.

Costs when buying a buy to let as an individual

• Financial advice on whether investing in property is the right decision for you.
• Stamp duty land tax will be payable, but if this is the only property you will own once the purchase has completed, you will not have to pay the 3% surcharge (e.g. you may live in a home with someone where they own the property and you do not, whether that is a parent, partner, friend or relative, in which case this may be the only property in your name).
• Conveyancing fees will apply for the legal work involved in buying the property.
• Letting agent fees may apply if you appoint an agent to manage your tenancy, or undertake isolated elements of the work in finding a tenant (as above).

As with investing through a company, if you take out a mortgage to fund the purchase of your property there will be upfront costs from the lender.

How does selling the property differ?

The sale of a property held within a company also has different tax implications, than if you were to sell a property you own in personal name.

Selling property held in personal name: Capital Gains Tax is payable when you sell a rental property (an asset) held in your personal name, which is worth more currently than when you bought it. (You would not normally pay CGT on your home, where you only have one home).

Basic-rate taxpayers pay 18% in Capital Gains Tax on the amount a property has risen in price by, after the Capital Gains tax-free allowance is deducted.

Higher and additional-rate taxpayers pay 28% in Capital Gains Tax on the amount a property has risen in price by, after the Capital Gains tax-free allowance is deducted.

The Capital Gains tax-free allowance for individuals has changed over the years, as follows:

So, in the tax year 2019-20, if you were selling a property that had increased in value by £11,900, as that sum is below the tax-free allowance, Capital Gain Tax would not be paid.

If instead the property had increased in value by £18,000, then you would pay Capital Gains Tax on the £6,000 profit that you had made, after the tax-free allowance was taken off.

If you bought a property in joint names as a couple, you can combine your Capital Gains tax-free allowance, meaning the amount you get taxed on could exceed twice the personal allowance.

Selling property held through a company: If you own property through a company, you do not pay Capital Gains Tax. However, any profit that is made when the property is sold, after any applicable “allowable costs” are deducted, will contribute to the overall profits of the company, which will be subject to Corporation Tax.

Corporation Tax is charged at 19% for profits under £50,000 and up to 25% on profits over £250,000, with a sliding scaled in-between.

The capital gain is calculated by taking the value of the property at the time of sale (usually what the company received for it) and subtracting from that amount:

• The amount the company paid for the property
• Costs spent on buying, selling or improving the property (to exclude maintenance costs)
• If the limited company owned the property before December 2017 you will need to use the Government’s guide to find the ‘inflation factor’ figure. Multiple this number by the amount the company paid for the property and also deduct that from the profit amount.
• If the company paid to improve the property, the impact of inflation can be calculated in the same way and subtracted from the profit amount.

Calculating the impact of inflation, for property owned prior to December 2017, will make the capital gain smaller and you will pay less tax, so although it is a little complex, it is worth doing.

If the company makes a loss on the sale of a property, capital losses can be subtracted from the company’s chargeable gain (but not from trading income or other profits).

If your company owns UK residential property worth more than £500,000, you may have to pay “Annual Tax on Enveloped Dwellings” (ATED). Information on ATED can be found on the UK government website.

The ease of management

The complexity of managing property varies in some ways, depending on whether you invest in buy to let through a limited company or personal name. Essentially, when more factors are at play (or those factors become more complicated), it can become more complex to manage your property(ies) yourself.

Managing a buy to let via a limited company

There are a number of scenarios you could encounter with investing via a limited company.

You may have established that incorporating your existing property(ies) does not make financial sense, but buying future property through a limited company will be more cost effective for you. This could lead to some of your properties being incorporated and some not.

You may only hold one or two properties, in a limited company, or you may have all of your properties in a limited company, of which you own many.

The more properties you own, the more likely it will be that having a professional managing the financial and day-to-day administration of them makes sense from both a practical and cost perspective.

A lot will depend on the yield you are achieving on your properties as to whether seeking professional help in managing them is affordable. Similarly, the cost of any professional services will impact your decision.

Managing a buy to let personally

Managing rental property where it is held in personal name may be simpler. Especially if you only own one or two properties.

Some landlords still prefer to pay for a letting agent, whether that is just to help find a tenant and/or collect rent. You can also opt for a fully managed service, where the agent acts as liaison with the tenant to handle everything from finding the tenant, to day to day queries and rent collection.

Similarly, filling in a self-assessment tax return and paying the right amount of tax is not straightforward for everyone, but vital to get right.

Even if your only income was from renting property, if that amount exceeded £2,500 you have to complete a self-assessment tax return.

As a result, you may opt to employ a tax accountant to handle this for you.

Whether you buy to let through limited company or personal names, finding a mortgage is unlikely to be something that is easy to do without the help of a specialist mortgage broker.

This is because there are over 80 lenders in the marketplace, offering thousands of mortgage deals and all are subject to rules (criteria) about the property, the investment route, and you /your company that influence if you can get a given deal and if it is the most cost effective option for you.

Need a hand with a buy to let mortgage? Speak to one of our expert brokers.