Buying property through a limited company: pros and cons

Landlords Nov 30, 2021

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. LLCs 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 LLC, 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.

Inheritance tax savings

If you plan on leaving your property to your children or other relatives, holding it in a limited company instead of owning it privately can offer huge advantages when it comes to inheritance tax.

By making family members shareholders, you may be able to help them avoid paying inheritance tax on the property or the proceeds from its sale after you die. It’s important to seek professional advice to ensure your company is structured correctly.

Disadvantages of buying property through a limited company

While buying property through an LLC might seem like the perfect way to lower your tax bill, this solution has several disadvantages too — and could actually end up costing you more.

Some potential downsides of buying property through a limited company include:

Differences in availability and cost of mortgages

There are fewer lenders willing to grant mortgages to limited companies than to private landlords, so you may find it more difficult to find a lender. Interest rates for commercial mortgages are also generally higher.

The upside, though, is that as well as mortgage interest being deductible as a business expense for LLCs, means testing is generally much less stringent for businesses, so you may be able to borrow more than you would as an individual.

Tax on rental profits

In order to access your rental income, you can either pay yourself a salary through your LLC or take a portion of its profit in dividends.

Income Tax is payable on any salary you take (as well as any income you receive from other sources) at the normal rates. However, salaries are counted as a business expense for the LLC, so the amount you pay yourself will be deductible when calculating your company’s pre-tax profit for Corporation Tax purposes.

Dividends are not counted as a business expense but are taxed at a lower rate than other income. At the current rate, the first £2,000 you earn in dividends are tax-free. After this amount, they are taxed at the following rates depending on your tax bracket:

  • Basic rate: 7.5 per cent
  • Higher rate: 32.5 per cent
  • Additional rate: 38.1 per cent

Though there are potential tax advantages to buying and letting your properties through an LLC, it’s clear that accessing rental income can be both complicated and costly. Again, it’s a good idea to consult with a tax accountant to determine whether you would actually benefit from this structure.

Potential Capital Gains Tax and Stamp Duty Land Tax

If you want to transfer a rental property you already own to a limited company, there are other costs to be considered. Since the LLC is legally distinct from you as an individual, the only way to ‘transfer’ the property to it is to sell it to the LLC at the open market rate according to an independent valuation.

This can result in high tax bills both for you as the seller (Capital Gains Tax) and for the LLC (Stamp Duty Land Tax) — which of course is likely funded by you as well. Figuring out if you’ll actually benefit from selling your property to an LLC in your name can be complicated, and will likely necessitate the help of an accountant (another added cost).

Since these costs can be prohibitive, some landlords choose to keep property they already own as private assets but set up an LLC to buy any new property they add to their portfolio.

Extra cost and administration

Running a limited company requires a certain amount of extra administration, which could represent further costs to landlords. LLCs are required to keep records related to the company and its finances, which could be checked by HMRC to make sure you’re paying the right amount of tax.

Limited companies must also submit their full annual accounts and company tax return with HMRC and Companies House at the end of each tax year. This usually means that you need to hire an accountant to prepare the accounts for you, which can be expensive.

When is it a good idea to incorporate a business?

Whether or not you should incorporate and run your property rental business through an LLC depends on a lot of factors, such as your income level, how many rental properties you have in your portfolio and what you plan to do with them in the future.

Generally speaking, if you only have one or two properties and take a modest rental income from them, registering an LLC might be overkill — and could end up costing you more. On the other hand, if you have a large portfolio and are a higher-rate taxpayer, the relative tax efficiency of buying and renting out property through a limited company could make it an attractive option. It could also be a good choice for those who wish to pass on their property investments to their children without the burden of inheritance tax.

Since one of the main disadvantages of this structure is the difficulty of accessing your rental income, incorporating is also a good choice for those who don’t need to use their rental income for their living costs, but instead want to leave it in the company and use it to invest in more properties.

Choosing whether to incorporate can be a tough decision that involves many considerations — and you could end up costing yourself more money if you make the wrong choice. You should always seek professional financial advice on your particular situation before deciding whether incorporating is the right move for you.

If you’re looking to buy new properties through an LLC and need to finance the transaction, you can use our free Finance Hub to access dozens of buy-to-let products tailored to your needs. Simply fill out a quick questionnaire to take the first step towards achieving your investment goals.

Article by Annie Caley-Renn

At Home Made, we offer a hybrid lettings solution that adds value at every stage of the rental process.  With our proprietary technology and data-driven marketing processes, we can help you to achieve higher rental yields and significantly lower operating costs, all while providing exceptional customer service that improves the rental experience for all stakeholders.

Our median time-to-let from point of listing is just 8 days and our clients save an average of £2,300 per tenancy with us. We charge 3% plus VAT for tenant-find services, 4% plus VAT per month for full management services, and there are no fees for renewals. For more information on our services, visit our landlord page.

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