Setting up a rental property as a limited company for buy-to-let landlords can be good for flexibility, potential tax advantages, easier property management and growing property portfolios.
But is it the right move for you? Let’s explore..
What Is A Limited Company?
A limited company is a type of business structure that legally separates the individual (or individuals) who own it from the business itself. For landlords, this means they can set up a company to own and manage rental properties, rather than holding them in their own name.
In practical terms, this structure means the company (not the individual) is responsible for any business expenses, liabilities, or profits. It also means the company, not the person, legally owns the property.
This separation can help protect personal assets, as business and personal finances are kept entirely separate. For property investors, setting up a limited company can give them tax advantages and clearer financial boundaries between personal and business transactions.
How Can You Set Up Your Rental Property As A Limited Company in the UK?
The process to set up your rental property as a limited company has a few key steps:
- Register with Companies House – Setting up a business involves choosing a unique company name and registering it as a company. You will need to provide details of directors and shareholders as well as a registered office address. Also, you will need to select a SIC (Standard Industrial Classification) code for your business – for buy to let properties this is likely to be 68209.
- Open a Business Bank Account – Make sure to open a separate business bank account where any financial transactions for the company will be handled.
- Register to Pay Corporation Tax – Once you’ve registered your company, you will need to set up corporation tax for any profits via HMRC.
- Keep Business Records – As a legal company, you’ll need to keep detailed financial records. If you work with a property management company, they will do this for you.
What Are The Differences Between Limited Company Owned Property and Individually Owned Property?
When you set up a limited company for buy to let properties, the limited company will become the legal owner of the property.
This has implications for liability – the company is liable for any mortgage payments rather than the individual. It also has tax implications. When the limited company is the legal owner of the property, the individual does not pay income tax on rental profits; instead, it is corporation tax. Corporation tax, as of April 2023, is 25%. Income tax ranges from 20-45%, depending on the tax bracket the individual falls under.
As corporation tax tends to be lower for high earners than income tax, there are advantages of setting up a rental property as a limited company.
What Are The Benefits Of Setting Up Your Rental Property As A Limited Company?
There are many reasons why property investors choose to set up as a limited company. Here are some of the key benefits:
- Greater flexibility: As a limited company, rather than an individual, it’s easier and more flexible to manage tax liabilities – especially for investors with multiple properties.
- Mortgage interest relief: Also known as Section 24, one of the main reasons for choosing a limited company is the ability to claim mortgage interest relief. Through this, individual landlords are restricted in the tax relief they can claim on mortgage interest (only 20%) – something they avoid if they set up as a limited company. Limited companies can claim 100% of mortgage interest costs so it works out as far more tax efficient.
- Faster growth of property portfolio: When landlords set up as a company, they are protected from tax liabilities and can retain profits, freeing up capital to acquire more properties and expand their portfolio faster.
- Easier planning: A limited company is simpler to transfer to another owner than a privately held property. This means that for things like inheritance, it can be a less complicated, more cost-effective and quicker procedure.
- Tax advantages: Limited companies can benefit from certain tax advantages, especially for higher rate taxpayers. These include lower National Insurance costs and lower taxes on rental incomes.
What Are The Downsides of Setting Up Your Rental Property as a Limited Company?
There are also certain drawbacks to setting up a rental property as a limited company including:
- Additional costs: Although you can save money on taxes, setting up a rental property as a limited company can come with added costs including preparing accounts, corporation tax, Companies House registration and legal fees.
- No Capital Gains Tax allowance: Unlike individually owned properties, there is no Capital Gains Tax allowance when a limited company sells a property.
- Higher mortgage rates: The majority of lenders have slightly higher interest rates and fees to limited companies taking out a buy to let mortgage. There are also fewer lenders willing to lend to limited companies rather than individuals.
What are the Tax Implications For Setting Up A Rental Property As A Limited Company?
There are key tax implications associated with buying a buy to let as a limited company rather than as an individual.
Limited Company:
As a limited company, you would pay Corporation Tax on any profit, rather than Income Tax. This would be 19% for profits up to £50,000 increasing up to 25% for profits over £250,000. Additionally, limited companies can benefit from a 100% deduction of mortgage interest as a business expense.
Individual Landlords:
Individual landlords would need to pay income tax on any rental income. This, coupled with any other income, will determine which tax bracket the landlord will be in. For the higher tax brackets (40% or 45%), this could be an expensive move. Additionally, individual landlords cannot deduct mortgage interest from rental income. Rather than a 100% deduction, they will receive 20% tax credit on the mortgage interest paid.
What To Know Before Setting Up Your Rental Property As A Limited Company
Before setting up as a limited company, you should be aware of all the legal responsibilities involved, including:
- The need to keep accurate financial company records (this is a legal requirement)
- Official filing of company accounts with Companies House
- Corporation tax return to HMRC
- Accurate and punctual tax payments to HMRC.
It can be complicated to keep track of the legal and financial requirements of a limited company for property, especially for those with larger portfolios. Seeking advice from a professional property management company can simplify the process and provide necessary support.
Rental Properties: Limited Company or Personally Owned
Before deciding whether a limited company is right for you as a property owner, you’ll need to consider the tax implications, the additional costs and the legal obligations.
Take into account your property portfolio, including how many properties you have, their value and your future plans for property investment. This will help you weigh up the costs and see if it is more profitable to set up as a limited company or not.
Need Expert Advice?
If you need help managing your property or deciding whether to set it up as a limited company, J Property Management is a London property management company that can help. To find out more get in touch with the team at info@jpropertymanagement.co.uk
