In the past few years, there has been a significant shift favouring purchasing buy-to-let properties under a Limited company. A Limited company is a legal framework that divides the obligations of the company shareholders from those of the company itself. Almost half of UK buy-to-let property purchases are now made through a limited company (GetGround). Modifications to the mortgage tax relief regulations are the main reason for this.
George Osborne began amending property laws in 2015, which resulted in landlords being unable to deduct mortgage payments from rental income. This has meant that landlords nowadays pay more taxes. Many landlords who hold property now see it as advantageous to hold their investments in a Limited company structure in order to pay corporation tax.
- Less tax
Rental profits generated in a limited company are not taxed at the same rates as personal income. Rather, companies must pay Corporation Tax, which is set at 19% and has no higher levels. Personal ownership means that rental income is seen as another form of income. As the rental income is added to your other revenues, this can push you into a higher tax bracket.
- Claim back your expenses
Mortgage payments can be treated as an expenditure in a limited company structure. Limited companies can deduct the whole of their mortgage interest from rental income profits. This is no longer the case for private ownership.
- Protect the investor
In the event that something turns out badly with your new property investment, forming a limited company can safeguard your personal finances. This is due to the fact that directors of a limited companies are only liable to a certain extent.
A limited company also allows you a lot of options in terms of how you make money from your real estate business. In order to still have access to a government pension and reduce personal tax, many shareholders of limited companies choose to pay themselves a salary, dividends, and executives’ loan repayment.
- Less inheritance tax
Through a limited company, landlords can apply for a Business Property Relief which can help save a lot of money on inheritance tax when transferring assets.
- Higher mortgage rates
While limited companies can obtain mortgages just like individuals can, many lenders will demand higher interest rates as a result of the privilege. Lenders can see it as a bigger risk to lend to companies hence the higher interest rates.
- No Capital Gains Tax (CGT) Allowance
Capital gains tax allowance allows a privately owned property landlord to save on some of the taxes associated with selling a property. Capital gains tax can be extremely high and considerably reduce the amount of profit one makes, in 2021-2022 corporations would have saved £12,300.
As corporation and dividend tax rates are significantly lower than the income tax rate for personal ownership it is not surprising that this has become a popular route to investing in buy-to-let. We advise that despite the drawbacks, if you are planning on buying a property as an investment, creating a company structure can greatly benefit the cash flow of your investment. The tax benefits can be seen particularly when you start growing your property portfolio and own more than one buy-to-let.