Deciding on the right set-up for you
Buy to let properties can be purchased and managed as an individual or through a limited company, with each option having its own implications for tax purposes.
If the intention is to rent out one or two properties, setting up a limited company is unlikely to be the right route. However, if a property portfolio is to be built up, then it may well be beneficial to create a limited company from the outset.
Buying a property through a company is becoming an increasingly popular choice for investors. According to Companies House data, a record 47,400 new UK buy to let companies were incorporated in 2021.
Buying rental properties through a limited company offers full tax relief on finance costs such as mortgage interest and mortgage arrangement fees, access to potentially lower tax rates and flexibility for planning, including for inheritance tax.
Mortgage interest relief
Limited companies can offset all their mortgage interest, and other finance costs such as mortgage arrangement fees, against profits from their rental income before paying corporation tax. This means that while individual landlords are effectively taxed on turnover, corporate landlords are taxed on profit.
Rental profits, after deducting finance costs such as mortgage interest, are currently subject to corporation tax at 19%. Small companies with profits of £50,000 or less will continue to pay tax at 19% from April 2023.
The main rate of corporation tax is rising to 25% from April 2023 where taxable profits are £250,000 or more. For companies with profits between £50,000 and £250,000 they will have a marginal rate of 26.5% on excess profits over £50,000.
Taking an income
As the company owns the property, the rental profits belong to the company. To access the rental income for personal use, a form of remuneration needs to be paid, which gives rise to a second tax charge. There are various options such as salary, dividends, provision of assets such as company cars or pension contributions. Each comes with tax consequences, and the best route will depend on personal circumstances.
Building a portfolio
If the aim is to invest in several buy to let properties and there is no need to draw much, or any, income from the rent, the company structure could be an attractive option.
A company can be a useful structure for those looking to pass on their property portfolio to family. It is typically more straightforward and cost effective to transfer company shares to family members compared to properties, or proportionate interests in a property.
For buy to let landlords looking to use their rent as a form of income to live on, purchasing as an individual may prove to be the more tax efficient solution.
Mortgage interest relief
From 2020/21, landlords were no longer able to deduct finance costs, including mortgage interest, from their property income; instead they receive a basic rate tax reduction to their income tax liability.
As well as restricting tax relief to basic rate (20%), the measure has the effect of increasing taxable income and can result in the landlord becoming a higher-rate taxpayer and may affect certain benefit entitlements such as child benefit.
Landlords are liable to income tax on rental income. The rental income will be added to the landlord’s other income to determine the tax band.
Capital Gains Tax
Capital gains on residential property are subject to CGT at 18%, where the gain falls within the basic rate band and 28% where the gain falls into higher rates.
HMRC require online reporting and payment of CGT on the disposal of UK residential property within 60 days of completion.
Taking an income
If the landlord wants to take a regular income from the buy to let properties, then investing as an individual is more likely to be tax efficient.
Preferable mortgage rates
Personal ownership typically attracts preferable mortgage rates and lower fees than through a limited company. Arrangement fees, which can either be paid up front or added to the mortgage, also tend to be lower when buying as an individual.
Seek advice from your mortgage broker.
How we can help
This is an overview of the key differences between owning a buy to let property through a limited company and as an individual – there are many variables that will influence your decision, and it can be helpful to seek professional advice when it comes to assessing your own circumstances and tax position.
Download our factsheet below for more details or get in touch with me at firstname.lastname@example.org for any enquiries on this matter.