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Please note that no one at Ready let properties is qualified to give tax advice so we always recommend that you speak to an accountant to find out what is best for you, before making any decisions on how you would like to purchase your properties, but you may find the notes below (taken from “This is Money” article dated September 2024) helpful when deciding if setting up a company is worth your consideration.
A record number of limited companies were set up last year to hold buy-to-let properties.
There are now 345,426 active limited companies that hold buy-to-let properties in the UK, up 50,000 on 2022, according to estate agent Hamptons. The number has grown every year since 2017.
Why is this? Some landlords are choosing to purchase or hold their properties within a company structure, rather than owning them as an individual, to enjoy the tax benefits afforded to limited companies but not individual taxpayers.
But please note that setting up a company to hold buy-to-let properties is not without pitfalls, involves complexity and will not save all landlords money.
How limited companies can reduce tax on rent
If you hold a buy-to-let property as an individual, any money you receive from rent is treated as income and taxed at your marginal tax rate.
In other words, if you are a basic rate taxpayer, you will pay tax on it at 20 per cent; as a higher rate taxpayer you'll pay 40 per cent; and additional rate at 45 per cent. The tax rates are slightly different in Scotland.
However, if you hold a buy-to-let through a limited company, any rent is treated as company income and is therefore subject to corporation tax, after deductions such as costs and business expenses.
Corporation tax tends to be lower than income tax, at 19 per cent on profits up to £50,000 and rising to 25 per cent on profits above £250,000.
However, remember that if you withdraw money from the business and pay it to yourself as an individual, you may have to pay income or dividend tax on what you receive.
Nevertheless, you could still pay less tax overall, as you can control how much you pay out as an income in each tax year to keep your bill in check – and the dividend tax is lower than income tax, should you pay yourself that way.
The basic rate of dividend tax is 8.75 per cent; higher rate 33.75 per cent; and additional rate 39.35 per cent. There is also a dividend tax-free allowance of £500.
You may be able to pay yourself a directors' loan from the company, which is a tax-free way of withdrawing money from the company, but this is not straightforward and – as with most business tax decisions – should be done in consultation with an accountant.
'For most landlords buying property today, going through a limited company is typically advised,' says Craig Hopkins, an accountant and founder of Property Accounts, which specialises in property investment.
'However, a lot of people don't really understand how companies work. You pay tax on profits in the company and then you pay a second level of tax when you take money out of the company at a personal level – except if you are repaying your loan account.'
Tax relief on buy-to-let mortgage interest
Note from Readylet Properties “Although we look for cash buyers, many of our landlords choose to get mortgages on their properties once they own them. Please note that minimum lending criteria needs to be considered and mortgage lenders change their criteria all of the time”
'Section 24' in 2017 stopped private landlords from being able to deduct all of their mortgage interest and arrangement fees from their rental income. Basic-rate taxpayers still get a 20 per cent credit to apply against mortgage interest, but higher and additional rate taxpayers cannot claim any more of their mortgage interest as a business cost, even though they pay more tax.
However, this full tax relief is still available to landlords of any income who own property through a limited company. They can still claim all these costs against income to reduce their tax bill.
JJ Mitchell, 44, who owns more than 50 properties in the West Midlands, held properties as an individual when he bought his first in 2008, but in recent years switched to buying through a limited company.
'If you're going to be a portfolio landlord, or own multiple properties, I think a limited company is absolutely the way to go,' he says.
'You get to put the full mortgage interest against your turnover. Using a limited company has worked well for me.'
Is it harder to get a buy-to-let mortgage in a company?
Getting a loan to buy a property through a company used to be much trickier. But the number of loans available has soared since this strategy started to grow in popularity. According to broker Mortgage Finance Brokers, around three-quarters of the applications it receives are from limited companies, up from just half in 2019.
However, mortgage interest rates are likely to be around one percentage point higher than if you were taking out a buy-to-let mortgage as an individual.
You may also be stung by high fees – ten per cent of the loan amount in some cases.
However you may also be able to borrow more through a limited company, says Mortgage Finance Brokers. That is because companies are required to show the rental income they receive is at least 125 per cent of the mortgage payments, compared with 145 per cent for individual loan applicants.
A limited company won't work for all landlords
There are cases where it may make sense to still buy properties as an individual.
If you have just one or two properties and are a basic-rate taxpayer – and are likely to remain so even after rental income is added to your overall annual income – a limited company may not be worth it.
Your age will play a factor, as someone reaching retirement age will have a higher degree of certainty over their earned and rental income compared to a younger person who may change jobs, careers and tax bands in the years ahead. Rental increases over time will also need to be factored in.
There is more bureaucracy and obligations with a company, such as having a separate bank account and producing full statutory accounts.
Accountancy fees for a limited company are typically more than £1,000, compared to doing your own accounts for free as a sole trader or hiring an accountant for a couple of hundred pounds.
You may end up paying more tax, too, if you sell a property and have made a large profit.
As an individual selling an investment property, you pay capital gains tax of 24 per cent on the difference between the purchase price and sale price (after deductions such as legal fees and estate agent fees). There is also a tax-free allowance of £3,000 per person.
Capital gains tax is not charged on profit made through a company and the capital gains tax allowance does not apply to companies. Any profit made will suffer corporation tax of at least 19 per cent plus further taxes if you extract the profit on sale as dividends.
If you already have a company that you use for another business, it tends to be better to keep this separate from any buy-to-let properties you own, says Ian Spreadbury, at accountancy firm Providence Financial.
'It is better to keep property investment separate from your normal business,' he says.
'That is because if you're running your own business, you're operating a trading business, whereas holding properties to rent out is considered by HMRC as an investment business. It is simpler to keep these separate.'
In summary - We hope you have found this useful, but remember if you are thinking of buying a property through a limited company, please speak to an accountant first. They will help you think through the key considerations and factors you may not have considered.