With everything from mortgage rates to the cost of doing business becoming more expensive these days, it can be challenging to get a decent return on your property investment.
As a result, many buy-to-let landlords choose to buy properties through limited companies instead of as individuals to save money on tax and keep their rental business going. But is it really worth it? Let’s take a look at the pros and cons.
What are my options?
Landlords typically have two choices when it comes to expanding their property portfolio: either purchase a rental property as an individual or through a limited company.
Your decision will affect how your rental income is taxed. Self-employed landlords (or private landlords) will pay income tax on all their earnings from rental properties. Meanwhile, those who buy through a limited company will pay corporation tax on the profits instead.
Mortgage interest payments
In the past, private landlords could claim the full amount of finance costs such as their mortgage interest payments to reduce their taxable income. However, this system has since changed, with self-employed landlords now receiving an income tax credit worth 20% of their mortgage interest costs. While the current system won’t make a huge difference to your finances if you fall into the basic rate income tax bracket, many higher and additional rate taxpayers see reduced tax savings as a result.
You can, however, still claim your mortgage interest as a business expense if you buy your properties through a limited company. Depending on your earnings and the size of your property portfolio, this alone could save you a decent sum of money.
Tax treatment of profits
Beyond claiming mortgage interest, setting up a limited company opens up a wide range of tax-saving opportunities for landlords. While private landlords pay up to 45% income tax on earnings, limited companies pay between 19% and 25% depending on their taxable profits. Company directors can also pay themselves a combination of salary and dividends to maximise their take-home pay.
Inheritance tax
Purchasing rental properties through a company won’t just reduce your annual tax liabilities — it could also leave your loved ones with a smaller inheritance tax bill. This area of tax can be complicated, so we’d recommend speaking to an expert to help you get the most out of your estate plan. Your accountant can advise you on how to use trust structures and company shares to reduce your inheritance tax liability while ensuring you meet your obligations.
What are the drawbacks?
As beneficial as buying rental properties through a limited company can be, there are a few drawbacks. Firstly, you’ll likely encounter higher starting costs. Not only are there fewer mortgage options for limited companies compared to private landlords, but they usually come with higher interest rates. You may also need to pay a higher stamp duty rate.
What’s more, there are extra fees associated with transferring ownership of your existing property portfolio to a limited company. Since you need to sell each property to your new business, you could incur a hefty capital gains tax charge if any of your properties have increased in value. And, of course, you’ll need to form a company before you can benefit from any tax savings, which can put a greater administrative burden on your shoulders.
What’s the best choice for my business?
There is no one-size-fits-all answer to how you should buy rental properties. The best solution for you will depend on your rental earnings, how much you make from other income sources — and your appetite for extra admin. Even if the choice seems cut-and-dry, you should always speak with a trusted tax adviser before buying property through a limited company. As accountants for property investors, we can help you identify the most tax-efficient way to structure your rental business.
If you do decide to incorporate, we’ll be by your side every step of the way, from registering with HMRC and Companies House to making the most of your expenses and other tax breaks.