If you rent out one or more properties, you’ll need to pay tax on your profits. This article considers the pros and cons of paying income tax as an individual landlord or paying company tax by having property through a limited company.
Is it worth setting up a limited company for buy-to-let?
Using limited companies to hold properties means you can pay corporation tax instead of income tax on profits which could help to minimise your tax bill.
Benefits of being a limited company landlord
There are several financial benefits of a limited company when you have property profits:
Tax benefits for higher-rate taxpayers
Rental profits on properties held in a company are not taxed at your marginal tax rate but the current corporation tax rate, which tends to be around half of the higher-rate personal tax.
Section 24 is not applicable
If a property is held by a limited company, 100% of mortgage interest and other financing costs can be deducted from the rental income when calculating tax. Individual landlords receive a tax credit of 20% of mortgage interest costs, leading to a much greater tax burden.
Better for growing your property portfolio
If you are planning to grow a property portfolio, you can retain profits in the company without them being subject to income tax enabling you to finance faster, more sustainable growth in your portfolio.
Limited liability
When you purchase property through a company, you are more protected if things go wrong. The company is legally separate from you and so is the property ownership.
Drawbacks of being a limited company landlord
Setting up a limited company to hold your properties may not be the right approach for smaller landlords. Some of the downsides include:
Higher costs for basic rate taxpayers
The costs of setting up and maintaining a limited company could outweigh the benefits if you are a basic rate taxpayer. Managing one or two properties under income tax may be easier and less expensive than using a limited company to hold the property.
If your salary or income from property increases and pushes you into the higher rate tax band, it’s worth considering whether a limited company might be more tax-efficient.
Capital gains tax burden
If you choose to sell a buy-to-let property, you’ll be subject to tax on any capital gain you make as an individual. By contrast, you will be charged corporation tax on gains if held through a limited company.
For individuals, there is a tax-free allowance of £3,000 (correct for 2024/25) which does not apply for companies. However, the capital gains tax allowance is now so small that many landlords have switched their properties into limited companies.
Company director’s legal and financial responsibilities
When running a limited company, you have additional legal responsibilities aside from your personal income reporting (self-assessment). You must file annual accounts with Companies House and you must submit company tax returns on time. Expect to budget around £1200-£1400 a year for accounting costs.
Tax implications of setting up a limited company rental business
There isn’t a single right answer to the question, ‘Should I set up a limited company for my rental properties?’ Your tax liabilities will depend on your circumstances and it’s a good idea to take professional advice from an accountant before making any financial decisions.
Income tax
If you set up a property company, you won’t pay income tax on the rental profits, which could save you money. Your income tax-free allowance can be used against any employment income rather than against your rental profits.
Corporation tax
You’ll pay corporation tax on any profits made by the limited company from rental income less expenses. You’ll receive full tax relief for mortgage interest because mortgage payments are classed as a business expense.
CGT
You’ll pay capital gains tax if you sell a rental property if it’s owned by you rather than through a limited company. However, you won’t benefit from capital gains tax relief as a ltd company landlord.
Inheritance tax
Using limited companies to own property can help to reduce your inheritance tax burden if you plan to pass on the assets to your children or other family members. Business Property Relief allows you to reduce the amount of inheritance tax payable.
Stamp duty land tax
When you transfer a property into company ownership, you may have to pay stamp duty depending on the market value of the property. If the property isn’t your main residence, then you’ll also pay an additional 3% SDLT as it will be classed as a second home.
How to set up a limited company for buy-to-let
If you are considering becoming a landlord, talk to an accountant to help you set up the company via Companies House before you purchase the property. It’s less expensive to buy the property through the company than to transfer it across at a later stage.
Can I be a first-time buyer landlord?
Yes, it is possible to be a first-time buyer landlord, although it’s not that common. This means you may find it harder to get a limited company buy-to-let mortgage as your first mortgage.
Get started with your property portfolio with Simmonds Mortgage services
Limited companies can make it more viable to create a property portfolio. Simmonds Mortgage Services can help you access mortgage lenders who provide competitive products for landlords. Contact us on 01184 693037 today for a free chat about your situation or book a meeting online.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial advice. You should always consult with a qualified financial professional before making any financial decisions, including but not limited to choosing a mortgage product.
