Purchasing A Buy-To-Let Property Through A Limited Company

29th August 2017 / in Contractor Mortgages & Protection Blog / by Gordon Hunter, MD

In the 2020 budget we saw further changes to the tax relief afforded to buy-to-let landlords. With this we have seen investment in property through a limited company grow in popularity, due to the same tax relief restrictions. You need to be aware of the main pros & cons that come with investing in property through a limited company, as well as understanding the requirements associated with doing so. Super Contractors understand that there are a lot of issues that need navigated when it comes to taxes & the unique circumstances of those involved. Which is why we consult with all our clients on an individual basis. With that being said, we hope that the below will help you make the right decision for you.

Improved Tax Efficiencies & Restriction in Tax Relief

When you own a buy-to-let property under your own name, you must pay tax on your rental income. The amount of money that you earn is added to your personal income, which in turn determines your income tax band. Your rental income could push you into a higher band, which may result in higher taxes for yourself.

Properties purchased under a limited company are not taxed in the same way. Instead, corporation tax, (which currently stands at 19%) is applied. Unlike income tax it has no upper brackets. The tax relief that private landlords can claim has been restricted since early 2017. It is no longer the case, where landlords can simply deduct costs such as mortgage interest from their rental income.

Contrary to this buy-to-lets owned within a limited company are not hampered by the same restrictions. Ltd company buy-to-lets are still able to deduct a variety of expenses, as these are considered business expenses. Super Contractors always advise that you speak to a qualified account regarding any potential tax benefits.

Advantages Of A Buy-To-Let Property Through A Limited Company

Quick & Easy: It’s relatively straight forward to set up a buy-to-let company online. However, as we have already addressed, ensure you contact an accountant before making any major decisions on this front.

Planning For The Future: When a property is owned by a company, you avoid potential issues that could arise from inheritance tax & stamp duty. Making it much more simple to leave a business to a family member in the future.

Expanding your Property Portfolio When your business is the one making profits from rent, it protects you personally from any tax. These increased earnings can be reinvested into future properties.

Lessen the Liability: All debts are held by the company. This ensures that you aren’t personally liable. You will still be accountable for any personal guarantees, which most mortgage lenders will require from you.

Disadvantages Of A Buy-To-Let Property Through A Limited Company

No Capital Gains Tax Allowance: You will need to work out whether the sale of a buy-to-let property is more financially beneficial than forfeiting the Capital Gains Tax (CGT) allowance that comes with being a private landlord. With buy-to-let properties you don’t pay CGT, but rather corporation tax.

The additional costs of running an LTD company: When setting up a limited company there are obvious costs. This tends to consist of, the preparation to the accounts (legal requirement), Corporation Tax, Filing at Companies House as well as any legal fees that are involved.

Higher mortgage rates: It is common practice that most lenders charge higher interest rates & fees to limited companies, than for individual buy-to-let mortgages.

A limited choice of lenders & mortgages: It must be acknowledged, that you will have more difficulty to find a lender that is willing to offer mortgages to limited companies, or potentially limited smaller range. Super Contractors have established great relationships with contractor friendly lenders that understand the unique employment status.

Setting Up A New Limited Company.

Some lenders will accept new, existing, or a subsidiary limited companies. However, some lenders will insist on a new limited company being setup. This is so you can prove to mortgage lenders that you have set up a new company with the sole intention of that company being used to invest in property and nothing else.

Standard Industry Classifications (SICs)

Some lenders insist on the company to be setup with one of the following SIC codes.

  • 68100 – Buying and selling own real estate.
  • 68209 – Other letting and operating of owned or leased real estate.
  • 68320 – Management of real estate on a fee or contract basis.

There are other mortgage lenders that are more lenient and don’t require these codes.

The company applies for the mortgage and the income of the directors is then assessed. There’s not yet a lender who can do Ltd Company Buy to Lets and assess you as a contractor, and as such it’d be a case of using the Company Accounts.

Taking Money Out Of The Company

There are other questions and costs to consider when setting up a limited company, for example how is the money in the company passed to the individual? The money can be taken out of the company as a dividend, but from April 2016 only the first £5,000 of dividend income is tax free. Any dividends taken out above this amount this will either be charged at 7.5% for a basic rate taxpayer, 32.5% for a higher rate taxpayer, or 38.1% for an additional higher rate taxpayer. This tax is after the corporation tax at 20% has been paid. *

The money could be taken as a salary, but the company would have to operate PAYE and pay Employers National insurance contributions. In some cases, this can work out more expensive than paying dividends. *

*Information above from Loan.co.uk, June 2017

Interest Rates

Interest rates charged on mortgages to companies have historically been higher than to individuals. Comparing rates charged between individuals and companies should be considered as well as the tax implications.

Due to the complexities in this area we recommend that Landlords seek proper professional advice before making the decision to move to a limited company structure. The information provided in this guide is of a general nature. It is not a substitute for specific advice on your own circumstances. We recommend obtaining specific professional advice from a tax and legal adviser before you take or refrain from any action.

For more information about buy to let mortgages, speak to our expert mortgage advisers on Freephone 0800 211 8700 or fill in our online enquiry form.

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Your property may be repossessed if you do not keep up repayments on your mortgage.

Lifetime Finance Group Limited does not offer advice on taxation matters. Please seek expert advice from a tax specialist.

Lifetime Finance Group Limited trading as Super Contractors is an appointed representative of PRIMIS Mortgage Network, a trading name of First Complete Limited, which is authorised and regulated by the Financial Conduct Authority for mortgages, protection insurance and general insurance products.

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