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Limited Company Buy to Let

12th May 2022

By Karina Nowicka

Buying or owning a limited company buy to let property. It’s complicated.

Limited company buy to let ownership is the way to go for many. However, it could be a disaster for other investors. Depending on your circumstances, it can sometimes be more beneficial to get a buy to let mortgage through your company. It can also be more tailored specifically to your business’ needs. With that being said, there are also a few disadvantages to consider. That’s why it’s very important to read into both options before making a decision.

In this limited company buy to let post and on the video we cover

So what is a Limited Company?

A limited company separates the responsibilities of the shareholders (business owners) and the business itself. 

This means your business can have its own assets as well as debts. Additionally, it means that if the company goes into debt, it’s not the business owner’s responsibility. So, the only thing that the owner would normally lose in this scenario, is anything that they have agreed to invest into funding the company. The main exception to this is if they have given personal undertakings regarding any debts the company may have.

When you set up your business, you can pick whether you want to operate as a sole trader, or as a limited company. If you choose to operate as a limited company in the UK, you must register it at Companies House. Once your company has been incorporated and registered, it becomes its own organisation and has to submit annual returns to Companies House. Normally, there are some relatively low accountancy/administration charges associated with a limited company. You may not get them in a sole trader scenario; unless you deal with the returns yourself.

As a director, you work for the company. As a shareholder, you benefit from the profits or losses. The directors manage the business for the benefit of the shareholders. Directors and shareholders are often the same person in a smaller business. The main differences to being a sole trader relate to how tax is treated. Usually, there are fewer liabilities for directors if the business fails owing money. As a sole trader, you are personally liable.

Pros of purchasing through a limited company buy to let structure

Many higher rate tax payers will find it’s more efficient for them to own a buy to let mortgage through their company. Since many of the benefits involve tax, it’s important to learn how they work beforehand. So what are the pros?

  • The most evident benefit of limited company buy to lets is the tax benefits. This is because the income from rent is seen as corporation tax, instead of personal income. This could be more tax efficient, especially for high rate tax payers.
  • The amount you pay in interest on your mortgages can be offset against your rental income. This reduces the taxable profit. This isn’t the case if the property is owned personally.
  • You could protect your personal finances and assets by starting a limited company. This is because limited company directors have limited liability privileges. 
  • It can be easier to manage proportions of ownership and profit by naming multiple shareholders or directors.
  • You can retain the money in the company and use it to fund further acquisitions. This can be done without paying further tax.
  • You may be entitled to different borrowing terms as a limited company.
  • Setting up is usually quick and easy. Nonetheless, seek some advice before making this decision.

Cons of purchasing through a limited company buy to let structure

As good as it sounds, getting a property in your limited company has it’s disadvantages too. Let’s weigh up on those:

  • Fewer lenders will consider limited company buy to let properties. Unfortunately, this means there is a limited number of lenders to choose from on the market. With less competition, you might end up with a higher interest rate.
  • There could be potentially additional fees from lenders or legal fees when buying or re-mortgaging. Also, charges such as corporation tax, filing annual accounts at Companies House and sometimes accountancy fees. Property investors should consider that they will have enough funds/profit for additional payments.
  • Despite the limited liability advantage of a Limited Company, some lenders may ask you to guarantee the debt personally – particularly on larger, more complex commercial transactions. You will still be held financially responsible for any personal guarantees that you have provided.

You should carefully weigh up on the pros and cons before investing in property through your company. Getting professional advice is always recommended.

What is the difference in tax?

Income tax

Personally owned and partnerships

When a private landlord rents out their property, (with the exclusion of personally owned furnished holiday lets), the rental income is taxed as personal income.

The rules have changed in April 2020. Private landlords can now only claim 20% of the mortgage interest and finance costs. Essentially, meaning that they are now paying more in tax, as explained in the table below. Finance costs could include extra costs associated with arranging the finance. These can include arrangement fees and legal costs. Even the costs on a loan to undertake repairs would be caught.

Some landlords could find that the tax they pay on their rental income could now be higher than their rental profit. This is particularly the case with lower yield properties.

Also, because the costs are no longer allowable, it may move a personal owning landlord into a higher tax bracket. This can mean paying even more tax with no increase in income.

With profits reduced and tax increased, personally owing landlords need to be more cautious. Consider things such as cash flow, increased tax liabilities and the overall viability of their rental business.

Limited company owned

However, the new rules do not affect buy to lets owned by companies. So, when purchasing a property via a company, the company only pays 19% in corporation tax on the rental income. Additionally, companies can claim mortgage interest as a business expense. This reduces the amount that is taxed.

This may look like an attractive deal to many landlords. But it gets more complicated. The rental income your company makes belongs to the company. As a result, if you wished to withdraw the money, you may have to pay more tax to do so. An upside is that you can retain the profit/cash in the company and use it to fund your next project. You may be able to do so without paying further tax. This could even be done via an intercompany loan to benefit a different but connected limited company.

There’s two ways to pay yourself from your limited company:

  • You can pay yourself a normal salary as an employee through PAYE, or
  • You can pay yourself dividends.

Other business expenses such as repairs, insurance, services etc. can still be claimed for both limited company and personal ownership.

Owning investment property in a limited company can provide other tax benefits. For a high rate taxpayer, rental profit on properties owned by a limited company are taxed at the prevailing corporation tax rate. This is normally around half of the rate charged on higher rate income tax.

Advice should be taken to weigh up the advantages and disadvantages.

Stamp Duty

This is a tax which needs to be paid each time property is purchased. There are various rates of stamp duty depending on:

  • If you already own a property
  • The purchase price
  • Whether or not you are a first time buyer
  • Whether or not you are UK resident

The rate at which SDLT is charged is the same, regardless of whether the property is purchased in a company or in a personal name.

Click this link to view the current stamp duty rates on residential property and add 3% in each banding. 

There are some reliefs and exemptions available to offset stamp duty for more complex scenarios such as a relief for multiple dwellings. Talk to tax expert about these.

If you are planning to transfer properties from personal to limited company ownership, there are further stamp duty reliefs to look out for. Multiple dwelling relief (MDR) could be an option where reduced rates or full reliefs are not available. The MDR applies a relief which is based on the average value of each property transferred. This can reduce the exposure to the higher rates and bands of SDLT.

Capital gains tax

When selling a property in a limited company there is no difference in the amount of capital gains tax charged, however, in a scenario where a property is being transferred from personal ownership to a limited company structure, a capital gains tax liability could arise based on the market value of the property being transferred. This means that, on transfer, the landlord may incur up to a 28% tax charge on the market value of the property even when no money has changed hands.

This raises the question; why bother?
The date of the transfer also crystallises the capital gains tax at that moment and valuation.
Therefore, should the property be sold by the company in the future, capital gains tax will only arise on the gain from the date of that transfer onwards.

There are some reliefs from capital gains tax when transferring ownership of property. Specialist advice needs to be taken. Ask about deferring tax through incorporation relief which allows gains to be rolled over and set against the cost of shares in the new company.  This could have the effect of deferring the tax charge until an individual sells the shares. 
Landlords who are not UK residents should also be aware that they are obliged to report property disposals to HMRC via non-resident capital gains tax return.

Inheritance tax

Holding property in a limited company gives you more options and is simpler when planning for inheritance tax.

Where a property business transfers to a limited company, the shares in the company form part of the individuals estate when they die. This can differ greatly from the value of properties owned personally.

This is also a point to think about the activities of the company. The shares in a property investment company, which deals in residential buy to lets, are inside the scope of inheritance tax. However, the shares in a property development company could qualify for business property relief.

Many landlords are involved in both, owning investment property and developing it, so it is important to draw these distinctions. A business which has a purpose of carrying out both investment and development activity may find that the investment activity impacts on the availability of the relief.
This is another area where advice should be sought.

A comparison of property taxes for personally owned and limited company landlords – correct at the time of publishing
Property Investment StageTaxPersonally OwnedLimited Company
BuyingStamp Duty Land Tax3% Surcharge3% Surcharge
SellingCapital Gains Tax£0 – £12,300 Capital Gains allowance – 0%
Basic rate tax payer – 18%
Higher & Additional rate taxpayer – 28%
19% Corporation Tax
Overall revenueIncome Tax£0 – £12,300 Capital Gains allowance – 0%
Basic rate tax payer – 20%
Higher rate taxpayer – 40%
Additional rate taxypayer – 45%
19% Corporation Tax

You should be familiar with this information before making your decision. Whether choosing to trade individually or as a limited company, there are several issues you must first consider. Speak to a tax specialist first. They will lead you in the right direction as there is no single answer to suit everyone.

Alternatively, visit Gov.uk for more information.

Setting up a property company to build a portfolio

Over the last few years, many landlords have brought properties via their company. Now that we know the benefits of the new tax rules, it’s a lot easier to understand why they are taking this approach.

As mentioned previously, to set up a limited company, you will first need to register it at Companies House UK, with a small fee. You will be required to fill in important information such as the name of your company, the address and the directors and shareholders details.

Check out this useful government guide on setting up a limited company

Details of Companies house fees

The application is quite straight forward and explains everything in detail. It helps you fill out necessary information. After your company is registered, you will have to create a business bank account. As well as register to pay your corporation tax. This is a pretty quick and easy process. Even so, you must be familiar with all the responsibilities owning a company comes with. As well as the costs and keeping tabs on your records. You can also, potentially hire an accountant to do this.

Eligibility

In order to buy property through your company, you must fit the criteria. Generally, if you are planning on taking out a mortgage, lenders may consider businesses which fall within one of the criteria below:

  • The business is an existing trading LTD company and is used to purchase the property.
  • An existing Special Purpose Vehicle (SPV) LTD company is used to purchase the property.
  • You are starting up your own limited company at the time of purchase.
  • Your are switching from individual owned to limited company at time of purchase.
  • It is a limited company with AND without a personal guarantee.

It all depends on the lender

When getting a mortgage for buy to let via a limited company, usually the overall amount that you could be able to borrow is 85% of the value of the property.

Most mortgages are available on an interest only basis and generally lenders want the annual rent to be at least 125% of the annual loan repayments.

Factors like your experience, income, credit history, whether you are a homeowner etc have an impact. They are all factors which will determine the lenders and rates available to you. Each lender is different and there are many specialist lenders you wont find on the high street or comparison sites.

Choose a decent broker with whole market experience in Buy to let, residential and commercial mortgages, plus second charge loans and bridging. If you are just getting started, your broker needs to consider all the options rather than shoehorn you in to a limited set of options.

In most cases, lenders are more likely to accept companies that specialise in dealing in properties. But, there are some lenders which might consider companies trading in different areas. However, choice of lenders for Limited companies is already more restricted.

Don’t make your life more difficult if you can avoid it

To give you a good choice , and therefore potentially better rates, try not to add more complications which in turn restrict the number of lenders available; such as:

  • Avoid borrowing through a businesses that trades in a different industry – e.g. not specifically property.
  • Being a homeowner already is more attractive to lenders than a tenant with less assets.
  • Having previous experience in property and buy to lets always helps.
  • Choose a standard property which is readily saleable – some lenders don’t accommodate holiday lets, HMO’s etc.
  • Ideally, the property should be rented on a standard shorthold tenancy agreement. Renting to other companies or unusual leases adds complexity some lenders don’t cope well with.
  • Avoid complex multi layered company structures with large numbers of directors or shareholders. Maximum of 4 is ideal.
  • Avoid foreign investors/cash in your company. Lenders want to know who is involved and where the money came from and ideally want to see the credit history on individuals involved.
  • Don’t assume you can borrow your deposit from another lender – some lenders prefer to see you have saved it and have some “skin in the game”. The exceptions are deposits which are gifts from close family.

This doesn’t mean the scenarios above cannot not be catered for. However, with less lenders to choose from your mortgage broker may need to approach lenders requiring larger deposits or offering less competitive rates.
Speak to a broker at an early stage so you know what your options are for financing the proposed purchase.

How much deposit do you need to borrow with a Limited Company?

It varies. The typical amount starts at about 20% to 25% for BTL mortgages. But, it’s important to keep in mind that the bigger your deposit the better rates you will be offered. Your lender will perform affordability checks on you beforehand.

Sole traders are also more likely to get a better deal. This is because some lenders don’t typically lend to limited companies. As mentioned above, companies are viewed as more of a risk. Therefore, the number of lenders for limited companies is restricted.

Moving a buy to let property into a Limited Company

Studies have shown that many landlords are transferring their BTL properties into a limited name. And since the new rules do not apply to properties owned by limited companies, many landlords are taking this approach to save money.

With that being said, if you want to transfer your BTLs, it will involve extra costs. These include capital gains tax, legal fees, stamp duty etc. It does also usually mean a sale and a repurchase.

There might be some exceptions for landlords, however we recommend speaking to a property tax specialist to find out more.

What about SPV LTD companies?

SPV (Special Purpose Vehicle) Limited companies are companies that only trade in rental property. This means they are companies set up specifically for buying or managing property. You can hold multiple properties under one SPV to help build a portfolio.

Setting up an SPV company is no different to setting up any other company. You register it online at Companies House for the same fee as you would with any limited company. It only takes a couple of minutes.

For SPV limited companies, getting a buy to let could be a lot easier. This is because SPV investments are a lot faster and easier for lenders to understand and underwrite. They don’t have to consider the trading entity or performance of any non property related business. This results in them being perceived as a smaller risk.

There are multiple benefits to having an SPV company. For example, if you took out a loan in order to make a personal investment for your SPV, you can draw it back by way of a director’s loan tax free! Also, unlike holding property in your own name, SPV companies deduct the finance costs from rental income. So, SPV owners can claim full relief on their mortgage interest.

With that being said, the mortgage interest rate for SPVs is often more expensive in comparison to personal mortgage rates. Nonetheless, it’s crucial to note that if you wished to draw all your rental profits as income, as a shareholder you may have to pay dividend tax. At the time of writing this is rising to 8.75% basic rate, 33.75% higher rate and 39.35% for additional rate dividend taxpayers.

There are multiple options for SPV Limited companies depending on your circumstances. Speak to an expert mortgage advisor to find out which suits you best.

What should you do?

If you already own property in your personal name it would be prudent to considering a restructure of how the assets are held. this may involve moving them to a limited company structure.

If you are buying property, consider how you will own the asset taking everything in to consideration – not just the tax position.

Get advice

There are a number of options to consider when it comes to property ownership. The attractiveness of each structure will change over time, as a result of changes in law and individual’s circumstances.

For example, a structure that can be useful as a property portfolio holding entity, is a private limited company. Also, often referred to as a family investment company. The ownership of a buy to let
portfolio can be transferred to a limited company entity, and in some cases an existing property business can be “incorporated” into the company.

In this scenario, finance costs are fully deducted and received by the company as taxable rental profits. These would no longer be subject to income tax (up to 45%) as trading income. They would instead be subject to corporation tax (which is currently 19%, although will be increasing to 25% from April 2023). Additional tax will be due when the funds are extracted from the company. But, if transacted carefully, this can be planned in a tax efficient manner. Depending on an individual’s specific circumstances, a limited company can allow for other tax, succession and practical advantages if set up carefully.

Typically, the transfer will be a disposal for UK capital gains tax and SDLT, meaning that immediate “dry” tax charges will arise upon transfer. These transactional taxes in particular can make the transfer to a limited company prohibitively expensive. Where certain conditions are met, relief may be available to extinguish/reduce capital gains tax.

Speak to a specialist

Further tax on profit extraction from the company to individuals can lead to double tax charges and careful planning of cash extraction should be considered. There are also increased administration costs associated with operating a company and there can also be complicated anti-avoidance provisions that need to be considered carefully so specialist advice should be taken.

Without a doubt you should seek the help of an experienced Buy to Let / investment property broker plus a good property tax expert. Don’t assume your accountant is an expert on this.


Talk to a Promise Money expert for more details


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