Buying property through a limited company: pros and cons

The tax year 2020–2021 was the first year that the provisions of Section 24 of the Finance Act 2015 came fully into force. This section introduced changes to the way that landlords calculate their rental income, and resulted in hefty tax increases for landlords.

These changes make the idea of buying and letting property through a limited company seem like an attractive prospect for landlords. Limited companies only pay Corporation Tax, charged at a much lower rate, which could potentially offer significant tax savings.

While there are also several other potential financial advantages to buying properties through an limited company, this strategy also comes with its downsides, including potentially high bills for other taxes such as Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT).

In this article, we’ll dive into the pros and cons of buying an investment property through a limited company to help you decide if it’s the right choice for you and your portfolio.

Advantages of buying property through a limited company

Many landlords who choose to buy and let properties through limited companies do so because of the potential tax savings, which could be substantial. There are several other advantages to this approach, including:

Limited liability

A limited liability company (LLC) is legally separate from its owners and directors. This means that they hold only limited liability if the company fails to meet its debts and obligations.

Operating your buy-to-let business in this way means that you’ll be protected in the event that the business ultimately fails to make its mortgage payments or other obligations. Directors and shareholders are only liable for the following in the event of the business failing:

• The amount of any personal guarantee they’ve made
• The amount they’ve invested into the company
• The nominal value of shares owned, in the case of shareholders

Reduced tax on profit

For private landlords, income from rent is added to any other taxable income you earn and taxed at normal Income Tax rates. For higher and additional rate taxpayers, any amount you earn above the personal tax allowance is taxed at 40 per cent and 45 per cent respectively.

If you buy a property through a limited company, the company will only be liable for Corporation Tax. The current Corporation Tax rate is 19 per cent, so this represents a significant tax saving for landlords.

Tax is payable on any income you take from the company in the form of dividends — though these are taxed at a lower rate than other types of income. We’ll go into the details of paying tax on dividends further on.

Tax treatment of mortgage interest

Interest on mortgage payments is no longer allowable as a business expense for private landlords, who instead receive a tax credit for the value of 20% of the total annual interest. This has resulted in a significant increase in the Income Tax payable by many landlords, with some finding their bill has as much as doubled since the changes were introduced.

Limited companies, on the other hand, can claim interest on loans as an allowable expense, which means it’s deductible before paying Corporation Tax. Naturally, this can be an attractive prospect for landlords wanting to save on their tax bills.

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