What Are the Tax Advantages of Buying a Buy-to-Let Through a Limited Company?

With all the changes to tax reliefs available for private, self-employed landlords, millions of property investors have looked at switching to trading as a limited company. There are distinct tax advantages to doing so, particularly for landlords in an additional rate tax bracket – but it’s not always a win-win! In this guide, Our mortgage brokers explains why buying a rental property through an incorporated company will reduce your tax bill but why you might end up with less of a saving elsewhere.

Why Will My Taxes Reduce if I Buy a Buy-to-Let Through a Limited Business?

Most incorporated companies set up to deal with rental properties are Special Purpose Vehicles (SPVs). This structure is the same as any other limited company, although it’s specifically designed for this type of business.

Tax advantages exist because corporation tax is a lot lower than income tax. If you’re in a higher bracket, you won’t have so few restrictions on the costs you can deduct before arriving at a taxable profit figure.

Corporation Tax vs Income Tax

  • Corporation tax stands at 19%, payable on taxable net profits (adding back things like depreciation which aren’t tax-deductible).
  • From 2023, companies with profits over £50,000 may have to pay a higher 25% tax, although this has tapered relief depending on the exact profit figure.

In contrast, those same profits from a rental property are taxed as follows for a self-employed individual:

  • Income up to £12,570 – tax-exempt as under the Personal Allowance.
  • The basic rate of 20% is charged on anything up to £50,270.
  • Earnings up to £150,000 are taxed at 40%
  • Anything over £150,000 falls into the additional rate band, at 45% tax.

If you earned, say, £99,000 profit in one year, you’d pay £18,810 corporation tax, compared to £27,032 income tax, so it’s a difference of £8,222 over 12 months.

Tax Reliefs for Buy-to-Lets Owned by Limited Companies

Another factor in favour of buying through a company is that you won’t need to worry about the restrictions on mortgage interest relief.

Private landlords cannot deduct all mortgage interest from their revenue before tax. Staggered changes to exemptions mean that now, investors are taxed on all rental income (gross) with just a 20% tax credit.

In essence, basic rate taxpayers probably won’t be impacted so much, but if you pay a higher income tax rate, this amendment will immediately mean your tax bill creeps ever higher.

As a company, you deduct all expenses associated with maintaining a rental property before you get to a net profit figure, so all interest payments are tax-deductible.

Let’s say you earn £50,000 a year from a property and pay £15,000 in mortgage interest as a theoretical illustration.

A limited company would deduct the £15,000 and pay tax against £35,000 profit. A private landlord could claim a 20% tax credit – up to £10,000.

Accounting for Stamp Duty on Limited Company Property Investments

There is another interesting perk to buying rental properties through a limited company, and it’s related to Stamp Duty.

If you’ve set up an SPV or another type of limited company and sold a buy to let asset, you’d have to pay Stamp Duty depending on the value of the property. Likewise, the same applies to a self-employed landlord.

However, if you have one rental property owned by one company, you might find a way around this by choosing to sell the company – not the property.

Effectively, you’d still be selling the asset, of course, but share sales are liable to Stamp Duty of 0.5%, which could be a massive saving, especially for higher-tier buy-to-lets such as HMOs!

Avoiding Liability Through Limited Company Buy-to-Lets

Finally, there is an advantage in owning buy to lets through a company. An incorporated business is a standalone legal entity that doesn’t impact your personal assets if it is liquidated or runs into problems.

While directors may have obligations, for example, if they sign a personal guarantee against lending, the degree of separation usually means that you have an element of liability protection.

If you invest in a buy to let as an individual, you are fully liable, so if something goes wrong, or you cannot repay the buy to let mortgage, it could potentially put your home and other assets at risk.

The Downsides of a Limited Company Buy to Let

There are a few caveats, and while you might save a bundle on tax, it’s important to go into any business decision with your eyes wide open!

Primarily, commercial mortgages aren’t subject to the same regulatory standards, and you’ll inevitably pay slightly higher interest rates on a business buy to let mortgage than you might on a regular BTL product.

There are fewer lenders to apply to, so costs will be higher, and any dividends or income you draw from your limited company will still be subject to dividend or income tax at the usual rates.

If you’re unsure which is the best option or want to compare the mortgage products available, please give Revolution Brokers a call on 0330 304 3040 or email us at [email protected]

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