A record number of new Buy to Let companies have been set up in the past few years (47,400 in 2021 alone). Landlords are turning to this business structure to save on tax – but is it the right route for you? Read on for the pros, cons, and other important implications.
What are the benefits to setting up a limited company for property?
Since tax relief rules changed in 2020, a significant number of private landlords have been moving to a limited company structure. This is because it’s now often much (much) more tax efficient to run things through a limited company than as a private landlord.
Let’s take a closer look👇.
Tax benefits of buying property through a limited company
Private landlords used to be able to claim all of their mortgage expenses as a business expense, which helped to significantly reduce their tax bill. But, between the years 2017-2021, new rules were phased in that gradually saw landlords lose this tax benefit. Each year across this period saw an additional quarter of landlords’ financial costs become non-deductible. By the financial year 2020/21, the rules had come into full effect. Since then, landlords have only been able to claim a tax credit based on 20% of their mortgage expenses. This means many private landlords have ended up paying a lot more tax – up to 40% more in some cases. Also, some landlords ended up in a higher tax bracket because of these changes.
On the other hand, when you let properties through a limited company, you can claim mortgage interest as a business expense. Which is why so many landlords are now opting for a limited company structure – it can significantly reduce their tax bill.
Higher rate taxpayers can also save money by going down the limited company route because of the different tax treatment for companies vs individuals.
As a private landlord, you pay income tax on your rental income plus any other income you get. The current income tax rates are:
Total income (after expenses)
Up to £12,570
0% – personal allowance
£12,571 – £50,270
20% – basic rate
£50,271 – £150,000
40% – higher rate
45% – additional rate
When you own a limited company, the company needs to pay corporation tax on its profits. The corporation tax rates were updated in April 2023:
19% on profits between £0-£50,000
26.5% marginal rate on profits between £50,001 – £250,000
25% on profits over £250,000
It’s important to note that with a limited company you still need to pay tax on the money you earn from or take out of the company. How much depends on whether you take a salary, dividends, or a combination of the two.
Taking dividends: Dividends are where shareholders take a portion of the company’s profits, which can be more tax efficient than taking a salary. Dividends are taxed at a lower rate than salaried income – you get £2000 tax-free, then you pay 8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate. They aren’t subject to National Insurance contributions.
There are some other tax implications to think about when it comes to taking a salary vs dividends, which we cover in the disadvantages section a bit further down👇.
Planning on passing your property or properties down to family members? Doing so through a limited company means you’ve got more options when it comes to mitigating inheritance tax. This is because there are ways you can structure your company to reduce or even eliminate inheritance tax responsibilities. Whereas, as a private landlord, there’s no way to avoid inheritance tax when passing down properties. Unless you ‘gift’ your properties while you’re still alive (sorry for the doom and gloom). But then this would mean paying Capital Gains Tax on the difference between the price you bought the property at and its current market value.
What are the disadvantages to setting up a limited company when buying property?
Buying property through a limited company (or transferring existing property to a limited company) isn’t necessarily a no-brainer. Although there can be a tax advantage (especially for large property portfolios), there are some downfalls to be aware of, too. And the pros might not always outweigh the cons.
Choice of mortgages
There are generally less mortgage products available for limited companies than private landlords. And interest rates are usually higher, too.
Tax implications of salary vs dividends
If you take a salary from your company this will be subject to income tax and National Insurance. But you can claim any salary paid by your company as a business expense. So it lowers your company’s overall profits, reducing its corporation tax bill.
Dividends are subject to lower tax rates and no NI – but they do not count as a business expense for your company. So you can’t write them off your tax bill.
If you plan on leaving your rental profits in your company, this isn’t really a problem. But if you live off your rental income, things can get a bit more complicated. It’s best to speak to an accountant or advisor to find out the most tax efficient route to take.
Cost and hassle of transferring property
If you’re looking to transfer property you already own to a limited company, there’ll be quite a few costs associated with this.
The process basically involves ‘selling’ your property or properties to your company – which comes with all the usual costs. These include:
Capital Gains Tax
Stamp Duty Land Tax (more on this below)
Conveyancing and solicitor fees
Potential mortgage repayment fee (if you’ve just started paying your mortgage off)
These costs can soon rack up and, for some landlords, mean it’s just not worth it to go down the limited company route. Having said that, the long-term tax savings can outweigh these costs significantly. So if you can afford to put the money up front now, you could potentially find yourself in a much better position later down the line.
Stamp Duty on transfer of property to a limited company
When you transfer a property to a limited company, you’ll need to pay Stamp Duty Land Tax (SDLT). It’s important to know that you’ll pay this on the market value of the property, even if you sell it for less than this.
It’s worth getting some advice around this though, because there might be ways to reduce the SDLT you need to pay. If you’re transferring two or more properties to your company, for example, the SDLT will be worked out by looking at an average of the value of both properties combined.
There are certain responsibilities attached to being the director of a limited company, which you don’t have as a private landlord. And there’s more paperwork to fill out through the year, too.
How to set up a limited company for a property
You’ll need to:
Register with Companies House (the fees for this start at £12)
Think of a name for your property company and provide a company address
Appoint directors and shareholders (you can be the director and sole shareholder if you want)
Define your business activity (letting property)
Set up a business bank account
Register to pay corporation tax
Keep certain records – including your confirmation statement and annual accounts
Tip: Hammock is an accounting platform built for landlords, by landlords, and compatible software with Making Tax Digital. You can track your income and expenses in real time, get ahead of your tax returns and track your buy-to-let investments. Many landlords who buy-to-let through a limited company benefit from using Hammock already, and we’re soon to launch additional features to make it even more useful for limited company set ups.
Structuring shares in a limited company for property
If you plan on having more than one shareholder in your property company, it’s worth seeking some expert advice. How you structure your shares can affect how tax efficient your company is – for example, there might be ways you can make it more tax efficient by making family members shareholders, and structuring these shares in a certain way.
It’s also important to be aware that anyone who owns 25% or more of the shares automatically becomes a Person of Significant Control (PSC). There can be more than one PSC for a company, and you have to identify who they are and inform the government. PSCs also sometimes get called ‘beneficial owners’ – they’re seen by the government as people who own or control the company.
Things can get really complex here, so it’s well worth speaking to an accountant. We’ll be publishing an article looking at this topic in more detail soon, too.
Should I put my rental property into a limited company?
Every landlord’s situation is unique – so there’s no clear cut answer to this question. But some things to bear in mind are:
If you own a smaller property portfolio and aren’t planning on expanding it in the near future, it might not be worth transferring them to a limited company because of the costs involved in this.
If you own a large property portfolio, or are planning to significantly grow a portfolio as a full time job, it could be worth setting up a limited company.
If you don’t plan spending your rental income in the near future, it might be worth setting up a limited company (in this case, it could be beneficial to leave your rental income in the company as it’d be subject to less tax this way).
One option could be to stay as a private landlord for existing properties, but set up a limited company for any new Buy to Let properties you invest in.
We hope this helps! Remember, if you have any doubts, it’s always best to get some professional advice. While there could be significant tax savings to be made from going down the limited company route – it’s not guaranteed that this is the better financial option for everyone.
We’ll be back soon with more useful updates!
Hammock is the accounting platform built for landlords, by landlords. You can track your income and expenses in real time, get ahead of your tax returns and track your buy-to-let investments.
Our guide is for educational purposes only, as we don’t provide tax advice. We always recommend consulting experts (in this case your accountant or tax advisor) when dealing with rules and regulations.