At the turn of the millennium there was no more than 5,000 Limited Companies set up for Buy-to-Lets, now we’re at roughly 35,000! The cause was the 2015 summer budget reducing mortgage interest relief for landlords with properties in their personal names.

So does that mean you as landlords should always get buy to lets through a company? Or even perhaps transfer existing property to a Limited Company?

It’s not that clear cut. Below we’ve got some of the pros and cons of both approaches for landlords managing their buy to let property.

Pros for landlords

Tax Relief for Limited Company landlords

From 2017 to 2020 the amount of Buy to Let Tax relief individual landlords can claim back will be cut from 45% to 20% for high rate taxpayers. But Limited Companies aren’t impacted, so won’t face the new hit.  

Landlord dividends

There’s always a tax free amount/or tax credit for dividends taken out of a Limited Company. So as part of a Limited Company, before landlords are taxed, dividends will be subtracted, lowering their overall tax bill.  

Landlord profit reinvestment

If you’re a landlord growing your BTL pot can be done quickly within a Limited Company, through the use of retained profit that isn’t subject to income tax. The extra funds to reinvest can as a result buy more property. Corporation tax is payable on profits (20%; 2015/16 reducing to 18% by 2020), this is much lower than the higher income tax rate (40% for £31,786 to £150,000; 2015/16).  

Personal funds can be drawn back out of the company

If you start your landlord journey with personal funds, any investment you make into the Limited Company can be taken out and placed back into your personal accounts (if classed as a Directors Loan).    

Lower personal tax for landlords

We’ve covered that the Corporation Tax is currently 20%, which is less tax that you’ll be paying via income tax as a higher rate taxpayer at 40%. You’re of course in charge of the funds in your Limited Company account. So after the 20% cooperation tax, you can drip extract funds year on year tax efficiently, to avoid a 40% income tax hit.  

Changing owners

The company owns the property and as a company can change directors and shareholders, ownership can be changed of properties in this manner You may be adding a partner to the company or buy to let portfolio to extract funds more tax efficiently. Changing owners via personal property sales can be far more cumbersome.  

Landlord credit rating

Mortgages held in a Limited Company aren’t always considered as personal commitments, therefore not impacting your personal borrowing. On the flip side, you can list your dividends received as an extra income, which in turn could increase the amount of credit offered to you.    

Landlord liability and credit rating

Utility companies and councils have an incredible knack holding landlords liable for unpaid tenant bills. This causes issues and can dent your credit history. But with a company, the landlord isn’t the owner therefore landlords are safeguarded from this risk  

Disadvantages

Capital Gains for Landlords

If you sell a property personally, you get a £11,100 CGT allowance (2015/16). For Limited Companies, there is no Capital Gains Tax (CGT) allowance  

Difficulty for landlords moving from personal to Limited Company

Transferring existing properties into the Limited Company is an expensive ordeal, Stamp Duty, Land Tax, Legal Costs, Higher Rates and potentially Capital Gains Tax are all costs that will be incurred. This points to the fact that if a landlord didn’t purchase a property through a company in the first place, it’s likely stuck that way.  

Administrative Tasks for landlords

You’ll need company accounts (balance sheets, end of year documents etc) through a private company. If a landlord usually does the finance work themselves, these tasks will add to that burden. Alternatively, getting an accountant will help, but that will cost usually between £80-£120 a month for the privilege  

Higher Landlord Mortgage Rates via a Limited Company

Buy to let mortgages are already more expensive than personal mortgages and some lenders even charge more if your purchase or renewal is through a Limited Company. Therefore these increased costs weigh on the tax benefits gained through the Limited Company Also not all lenders offer mortgages to Limited Companies, so landlords purchasing through a Limited Company may have to shop around a lot more  

Privacy

Personal income is private, which means your mates (or enemies!) can’t look you up to see how rich (or poor) you are. A Limited Company has to publish its accounts, available online at Companies House showing your property portfolio company financial status to the public. So a quick Google search on your full name will bring up your assets, dividends and shareholdings to everyone bothered to search!  

Releasing Equity

Refinancing is useful for the new car, holiday or home extension. With Limited Company property, you can still release equity but not to your personal ventures as you’ll be hit on the income tax requirements! Any equity released are funds of the company – to be re-invested.  

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