Setting up a limited company for property rental / landlord - pros and cons

As a landlord, you can buy your properties as an individual and pay income tax, or you can buy them through a limited company and pay corporation tax.

Over the years, the government have eroded some of the benefits that landlords obtain including changes to mortgage tax relief rules. With private landlords not being able to deduct mortgage expenses from their rental income to reduce their tax bill. This has forced many smaller landlords out of the market and has led to many more changing their status from paying tax as an individual to paying it via a company structure.

If you’re planning on investing in a buy-to-let, HMO or holiday let properties, it’s important to consider a limited company structure, particularly if you are a higher rate tax payer as corporation tax rates paid by limited companies are significantly lower than income tax rates.

If you are considering whether to set up a limited company as a property investment company to purchase buy to let property, then this blog will cover the advantages and disadvantages if you purchase property through a limited company.

Can I set up a limited company to buy property?

The simple answer is yes, you can set up a limited company to purchase buy to let property and there can be advantages to buying properties through a company.

Is it worth putting property into a limited company?

This blog will cover the pros and cons of purchasing property through a limited company. In many cases it is worth putting rental property into a limited company to minimise tax liabilities, but this may depend on the amount of properties, your future plans, whether you own the property personally already and your income tax bracket.

Pros and cons of using a limited company to buy property

There can be many benefits of buying property through a limited company and these are listed below but you must consider some disadvantages as well before making a decision. It’s worth consulting a tax expert to work the figures out for you to enable you to make an informed decision.

Advantages of buying property through a limited company

1. Tax treatment of profits - income tax vs corporation tax

For private landlords that don’t run a limited company, profits from rental income are taxed via income tax alongside other earnings such as another salary, interest etc. Income tax rates are below.

Higher rate taxpayers or additional rate taxpayers stand to pay a huge amount of tax on this income.

However, if you invest in property via a limited company, you will be liable for corporation tax on your profits. The corporation tax rate is currently 19 per cent but will rise to 25 per cent by 2023.

You could still be liable for income tax when you pay yourself out of a limited company, but many limited company landlords pay themselves a small salary and then higher dividends as dividend tax rates are far lower than income tax rates (see dividend tax rate table below).

2. Tax treatment of mortgage interest costs

The government abolished the ability for private landlords to deduct any mortgage interest or mortgage expenses from rental income to reduce their tax bill. Instead, individuals are now given a tax credit based on just 20% of their monthly mortgage interest payments.

This means if you’re a higher rate or additional rate taxpayer, you won’t get all the tax back on your mortgage interest costs.

If you buy property via a limited company ownership structure, then mortgage interest is treated as a business expense. So, you can deduct the cost of mortgage interest before you pay corporation tax.

3. Inheritance tax benefits

If you pass property down to your children or other family members, then buying the property through a limited company could avoid large amounts of inheritance tax. Your benefactors could apply for Business Property Relief (BPR) on their assets. This is because property investors can hold shares in a tax-efficient ISA account and therefore qualify for BPR.

You can use things like trust structures, shares, and other methods individual landlords don’t have access to.

4. Reinvesting funds

If you are going to buy a second or multiple properties to build your property portfolio, you may want to reinvest your income to buy additional properties.

Individual landlords will pay income tax on all profits so will be reinvesting money after they’ve paid income tax.

However, by using a company structure, your profits after corporation tax can be kept within the company and directly used to reinvest, making reinvestment more tax efficient.

Disadvantages of buying property through limited companies

When running a company, you’ll need to pay yourself a salary to get access to your rental income. This may still be liable to income tax. However, salaries are considered as a cost when calculating your pre-tax profit for corporation tax purposes.

You can take a high proportion of rental income as dividends, however, these are NOT considered a business expense, so you’ll still pay corporation tax on this income as well as dividend tax for anything you take as a dividend.

For tax year 2022-2023, the tax-free allowance on dividends is £2,000. How much tax you pay on dividends above this amount depends on your tax band. The following dividend rates apply:

Dividend tax rates

If you plan to keep the rental income in the company and reinvest it, then this won’t be a problem. If you do want to draw more of the rental income out as personal income, then you just need to consider the tax rates and how you do this. Speak to a tax advisor as there are ways of splitting income, putting money into a pension etc. that could be tax efficient.

Transferring ownership from personal assets to a limited company

If you already own a property or propeties in your own name and are considering transferring properties to a limited company, then there are some other tax implications you should be aware of.

Capital Gains Tax (CGT)

Undertaking a transfer of property to a company is chargeable to Capital Gains Tax (CGT) at the market value of the property. Even if you transfer it at lower than market value or gift it to the company it is still subject to CGT.

The amount of CGT you will pay is dependent on how much income tax you pay. If you’re a basic taxpayer you’ll pay 18% CGT, a higher rate taxpayer will pay 28% CGT.

Stamp duty land tax (SDLT)

Stamp duty may be payable on transfer of properties to a limited company if the value of each property is above a certain amount. The calculation of the charge is again based on market value not transfer value. 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.

Legal & mortgage charges

You’ll need a solicitor to do all the necessary paperwork for a legal transfer and also some mortgage lenders will charge you a repayment fee if you are early in the mortgage process, so you must factor in these costs if you intend to transfer a property or properties from personal ownership to a company.

It is generally more tax efficient to register your company before purchasing property in the first place, rather than transferring it at a later date.

Ongoing costs

Running a limited company requires additional compliance and legislation with Companies House and HMRC, so you’ll need an accountant to undertake this work, which will cost additional fees.

Can I live in a property if owned by my ltd company?

Yes you can, but there may be tax consequences and also consequences if the property is purchased using a buy to let mortgage as many lenders forbid you from living in a property purchased with a buy to let mortgage. Seek advice.

Should I buy my first buy to let property through a limited company?

This depends on if you plan to buy other properties and become a multi property investor. If you’re only planning to rent out one or two properties, then setting up and running a limited company may not be beneficial. If you plan to purchase several properties, then is it better to do this using a company structure from day one and purchase the property via a limited company. Seek advice before you buy the property and discuss your plans with an accountant.

Summary

There are many benefits to owning multiple buy to let properties in a limited company, but you need to consider the potential size of your future property portfolio and also consider implications if you’re transferring property from personal ownership to a limited company.

Here at dns accountants we support landlords and property investors and advise on all the implications of holding properties as personal assets vs through a limited company. For more help and advice, call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.