Buy To Let Under A Limited Company | Landlord Guide

The number of Limited Companies set-up for Buy-to-Lets is on the rise! At the start of the millennium, there were only about 5,000 in place. Now, there are roughly 35,000. Why? In 2015, the summer budget reduced mortgage interest relief for landlords who own properties in their own names.

So, does this mean that landlords should avoid buying a property in their own name and instead always let through a company? Should some go as far as to transfer existing property to a Limited Company?

These decisions will all impact how landlords are taxed, how funds can be re-invested, and how expenses (including property manager costs) are managed.

It’s not that simple. Below we’ll cover both the pros and cons of each approach to help landlords figure out the best avenue for managing their buy-to-let properties.

PROS FOR LANDLORDS

Tax Relief for Limited Company landlords

Between 2017 and 2020, the amount of Buy-to-Let tax relief that individual landlords can claim will be reduced from 46% to 20%, but only for high-rate taxpayers. Limited Companies will not be impacted by this change.

Landlord Dividends

There is a tax credit or tax-free amount for any dividends taken out of a Limited Company. As part of a Limited Company, dividends are subtracted before landlords are taxed. This lowers the overall tax bill.

Landlord profit reinvestment

Retained profit isn’t subject to income tax, which means this is the best option if you’re a landlord that wants to grow your BTL pot within a Limited Company. You can buy more property by reinvesting these extra funds. Corporation taxes are payable on profit, which was 20% in 2015-2016 but is scheduled to reduce to 18% by 2020). This is much lower than higher tax rates like 40% for £31,786 to £150,000 as of 2015-2016.

Personal funds can be drawn back out of the company

Landlords who start off using personal funds, all investments made into a Limited Company can then be withdrawn and placed into any of your personal bank accounts. This holds true as long as they are classed as a  Director’s Loan.

Lower tax for landlords

The Corporation Tax is currently at 20%. This is much less than the 40%  you’d pay through income taxes if you’re a higher rate taxpayer. You’re still in control and in charge of your funds in a Limited Company, which means after the 20% corporation tax, you can slowly withdraw funds each year to avoid the 40% hit. 

These taxes are applied after expenses. Operating costs, maintenance, and letting agent fees can all reduce your end of the year tax amount, regardless of whether or not you purchase your buy-to-let property from a company or not.

Changing owners

The Limited Company technically owns the property, and that means they can change shareholders, directors, and ownership. Changing owners through personal property sales is tedious and confusing. Instead, you can add a partner to the company or to the buy-to-let portfolio to more efficiently extract funds for tax purposes.

Landlord credit rating

Any mortgages held within a Limited Company are considered personal commitments and should not impact your ability to personally borrow money. On the other hand, you can list any collected dividends as income, which may increase your amount of available credit. 

Landlord liability and credit rating

As the landlord, you can be held liable for any unpaid tenant bills by the utility company or council, negatively impacting your credit history. When you work within a Limited Company, the landlord isn’t the owner of the property, which means they’re protected from this risk.  

DISADVANTAGES

Capital Gains for Landlords

Any personal property you sell is eligible for a £11,100 CGT (capital gains tax) allowance as of 2015-2016. Limited Companies don’t incur any CGT allowance. 

Difficulty for landlords moving from personal to Limited Company

When you transfer existing properties into a Limited Company, there are associated costs that can add up quick. Expenses include legal costs, land taxes, stamp duty, higher rates, and the possibility of capital gains taxes. If a landlord didn’t purchase the property through a Limited Company, to begin with, this can be difficult (and expensive) to change. 

Administrative Tasks for landlords

When working through a private company, you’ll need balance sheets, end of year documents, and other company accounts. This only adds to the burden of handling all the finance work as an independent landlord. Hiring an accountant can help but will cost you between £80-£120 a month.

Higher Landlord Mortgage Rates via a Limited Company

Most people rent out their house to turn a profit. But one expense to consider is the mortgage. Buy-to-let mortgages are notoriously more expensive than personal mortgages. Some lenders even charge more if your purchase or renewal is done through a Limited Company. This increased cost also impacts the tax benefits gained through the company. Not all lenders will offer mortgages to Limited Companies, either, which means landlords are forced to price shop several different avenues. 

Privacy

Personal income is private for a reason. You don’t want your ex or your enemies looking up your financial history. A Limited Company is required to publish all of its accounts online. These records are available through a Companies House. Here, it shows the property portfolio including the financial status. A quick Google search of your full name will tell the whole story from assets to dividends and even shareholdings for all the world to see!  

Releasing Equity

Refinancing is common when you need extra funds for home renovations, a new vehicle, or even a holiday! When dealing with a Limited Company property, you can still release equity but because it’s not your personal investment, you’ll get hit on all tax income requirements. Any of the equity released is considered company funds and must be re-invested.

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