With the property market riding high at the moment, more people are considering investing in buy to let property, and the advantages of doing so via a limited company are coming to the attention of investors. However, there are pros and cons to consider if you are thinking of doing this. It is important to seek professional advice from a financial expert that is tailored to your particular circumstances, but here are some of the key points to think about.
- As a private landlord with a property in your own name you will be liable to pay income tax on your rental income, since this money is viewed as personal income by HMRC. So, if you have another job, your rental income might push your income into a higher tax band
- Buying via a limited company could allow you to pay less tax, since income from property owned by a limited company is subject to corporation tax rather than income tax. At the moment, this rate stands at 19 percent for the 2022-23 tax year, so it is more tax efficient to generate income through a limited company
- If you own your rental property through a limited company your expenses – such as mortgage interest – are classed as business expenses. So, you may find that you can claim back more of these costs, whereas a buy to let property owned personally is unable to deduct mortgage interest costs as a deduction against tax.
- Setting up a limited company can help to protect your personal finances if anything goes wrong with your investment, since limited companies provide limited liability for directors.
- Many investors are looking at using buy to let via a limited company as a way of passing on a property portfolio to loved ones as an inheritance. A limited company structure could make this process easier because the property would remain in the ownership of the company even when directorship of that company changes hands.
There are, however, some difficulties involved when buying property through a limited company.
- Obtaining mortgages at a competitive rate can be difficult.
- Limited companies do not receive a Capital Gains Tax allowance, so owners are taxed on the entirety of the profit on the sale of a property. Also personal tax will be payable on exiting the company on a solvent winding up.
- A limited company will also still have to pay the second home surcharge of 3 percent on properties over £40,000. This is the case whether it’s the first property purchased by the company or not. But for all non-residential or mixed-use properties purchased by the company, the regular non-residential rates apply. (There is no 3% surcharge on non-residential properties for companies.)
- There are extra responsibilities too, including:
o Keeping accurate financial records throughout the year
o Preparing and filing annual accounts at Companies House
o Filing a confirmation statement at Companies House
When applying for a buy-to-let mortgage as a limited company, most lenders will require your rental income will need to be at least 125 percent of the monthly mortgage payment.
As always, it is important to seek advice from a qualified accountant or financial advisor before making any firm decisions. Get in touch today for our guidance.