Should you set up a buy-to-let limited company?

Considering investing in a rental property?

While you’d think managing it through a buy-to-let limited company would be overkill, there are compelling reasons to do it even if your plan is just to make some extra cash on the side.

Here’s how owning a rental property through a buy-to-let company differs from owning it in your own name, and a look at the pros and cons.

Why own property through a buy-to-let limited company?

Owning property through a buy-to-let limited company has three key benefits:

  1. It limits your financial exposure
  2. It makes it easier to plan for the future
  3. And, crucially, it can be more tax-efficient than owning the property in your own name

Limited liability companies have a separate legal personality. This means the buy-to-let company, not you, is the legal owner of the property. So, should something go wrong it’s the company that would be on the hook.

Let’s say a tenant decides to sue you because they’re unhappy with the state of the property.

If you owned the property in your own name, the tenant would sue you directly. And if you lost the case, you’d have to pay legal costs and the settlement the court decides to award out of your own pocket.

The same could happen if you ever found yourself struggling to keep up with your mortgage repayments.

The bank would first sell off the property to make its money back. But if the proceeds of that sale aren’t enough to cover what you owe, it could sell off your personal assets to make up the shortfall.

By contrast, with a buy-to-let limited company, it’s the company that’s responsible. Your liability is limited to the value of the company shares you own and are yet to pay for.

Limited companies with a sole director and shareholder typically have 100 shares priced at £1 per share. So your maximum personal liability if things do go south would be £100.

Succession planning

A buy-to-let limited company’s separate legal personality also makes it easier — and cheaper — to pass on your property to someone else in future, such as your significant other or your children.

When you own a property in your own name, giving it to someone else involves transferring the title deed.

You’d need to hire a solicitor to handle the conveyancing, and you’d have to pay stamp duty and capital gains tax. And if you left the property in your will, it would be subject to inheritance tax.

With a buy-to-let limited company, things are much more straightforward: you simply give your shares to the person you want to hand over control to.

Because the person you’ve transferred your shares to now controls the company, they also control the property and can benefit from the income it generates. But, technically, the company still owns the property, so there’s no need to transfer the deed.

You also don’t pay stamp duty — you do have to pay it on the company shares if money changes hands, but at 0.1% it’s lower than stamp duty on property —  capital gains tax, or inheritance tax.

The tax benefits of a buy-to-let limited company

Aside from limiting financial risk and making it easier to pass property on, a buy-to-let limited company also offers some significant tax savings.

1. You don’t pay income tax or National Insurance

If you own a property in your own name, the rent you earn from the property counts as income, which means it’s subject to National Insurance and taxed at your highest income tax rate.

This could increase your tax liability significantly.

Imagine you earn £35,000 a year from your day job and £9,600 a year from your rental property.

Because you own the property in your own name, the whole £9,600 — less expenses such as the cost of maintenance, insurance, and agency fees — will count as income.

Let’s say you’ve made £1,000 in expenses (these don’t include your mortgage interest. That’s treated separately and we’ll discuss it in a minute).

The remaining £8,600 would increase your taxable income to £43,600 and push you into the higher rate band.

Your tax bill for 2022/23 would then look like this:

  • You’d pay no tax on the first £12,570, 20% on £25,130, and 40% on £5,900. This would add up to £7,386
  • You’d also pay £4,110.72 in National Insurance contributions

That means that, in total, you’d owe HMRC £11,496.72.

In comparison, a buy-to-let limited company only pays corporation tax, which is currently 19% of your profit.

You could then take the rest of the profit from renting out the property as dividends.

Dividend tax is much lower than income tax or NI, and the first £2,000 are tax-free. So, if you were to take out a dividend of £8,600 — your rental income less £1,000 expenses — you’d pay £577.50 in tax.

When you factor in corporation tax, and income tax and NI on your salary, your tax bill would be £9,648.50 — a saving of £1,848.22.

2. You can deduct your mortgage interest payments from your taxes in full

The tax savings don’t stop at lower rates. A buy-to-let limited company is also more tax-efficient because you can deduct your mortgage interest payments from your taxes in full.

Since April 2020, individual landlords can no longer deduct all their mortgage interest from their rental income. Instead, they get a 20% tax credit.

To use our previous example, if your salary is £35,000 a year, your rental income is £9,600 a year, and the interest on your mortgage is £4,600 a year:

  • You’d pay income tax and National Insurance on the full amount you’ve earned in rent less expenses — in our example, this is £43,600 — with some of it taxed at 40% because you’ve been pushed into a higher tax bracket
  • And you’d get a 20% credit on your £4,600 mortgage interest, that is £920.

By contrast, as a limited company, you can deduct the full £4,600 from your rental income and pay corporation tax on £4,000 only (rental income, less £1,000 in expenses, less £4,600 mortgage interest).

That would change the worked example above as follows:

  • Corporation tax — £760
  • Income tax and NI on your salary — £7,457.20
  • Dividend tax on your retained profit (£4,000 less £760 tax) — £108.50
  • Which means your total tax bill is £8325.70 — a saving of £2,251.02 over owning the property as an individual

3. You’re exempt from capital gains tax

As an individual landlord, you have to pay tax on your ‘gains’ if you sell a rental property. This is the amount you sell the property for, less what you paid when you bought it and associated expenses such as survey fees and solicitors’ fees.

The first £12,300 is exempt. You pay 18% on the rest of your profit if you’re a basic rate taxpayer, and 28% on anything that puts you in the higher rate tax bracket.

Limited companies don’t pay capital gains tax. Instead, you’ll pay corporation tax on your profit at 19%.

It’s worth noting that, because the £12,300 tax-free allowance doesn’t apply to limited companies, the capital gains tax exemption won’t necessarily lower your tax bill.

That said, depending on your circumstances, it may well work out cheaper, so it’s a good idea to crunch the numbers. Plus, paying a straight 19% is simpler than working out how much you have to pay at 18% and at 28%.

The disadvantages of buy-to-let limited companies

While buy-to-let limited companies have compelling benefits, there are some downsides you’ll need to take into account.

As we’ve mentioned above, the £12,300 capital gains allowance doesn’t apply, which means the profits from a property sale are taxed in full.

More to the point, owning a property through a buy-to-let company can be slightly more expensive, for two reasons.

First, not every lender offers buy-to-let mortgages to limited companies. And those that do typically charge higher interest rates.

When Which? ran a comparison in 2019, it found that the interest rates lenders offered limited companies were around 1% higher than the rates they offered individuals.

Second, buy-to-let companies have running costs you wouldn’t incur as an individual landlord.

Alongside the initial cost of setting up a limited company, you have to prepare annual accounts every year. Accountants tend to charge higher fees for limited company accounts, because they can be trickier to do. You’ll also have to file paperwork and pay fees to Companies House annually.

You don’t need to be an aspiring property mogul to benefit from a buy-to-let company

If you want to limit your financial risk, make it easier to pass on your property to loved ones, and make some hefty tax savings, a buy-to-let limited company is worth considering, regardless of how many properties you plan to invest in.

Just keep in mind that limited companies usually have higher expenses. An accountant can do the maths and let you know if these will cancel out your savings or whether a buy-to-let company is still the way to go.