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Buy To Let Limited Company Pros & Cons

limited company buy to let mortgage

If you’re considering becoming a property investor and landlord, then you can choose to buy the property in your own name or through a limited company. For the limited company, the obvious merits are the tax benefits and limited liability compared to a private investor but there would be additional costs to this route to factor in.

Pros of limited company property investment: 

  • Tax Efficiency
  • Mortgage Interest Tax Relief
  • Flexibility in Ownership
  • Limited Liability Protection

Cons of buy to let through a limited company: 

  • Higher Setup and Running Costs
  • Increased Administrative Burden
  • Limited Mortgage Availability
  • Double Taxation
  • Reduced Personal Tax Allowances
  • Complexity in Closing or Selling

This article evaluates the pros and cons of investing in a buy-to-let property as a limited company.

What is a limited company?

A limited company is a legal structure that separates the responsibilities of the business owners and shareholders from the business itself.

To operate within the UK, every business must register with the Companies House and become a legal entity. That ensures the business has its own debts and assets and that directors and shareholders enjoy limited liability for losses incurred by the business.

No director or shareholder of a limited company loses more than what they invested. This concept differentiates the limited company from the sole trader who is responsible for every debt or loss of the business.

How do these definitions affect the decision to purchase a buy-to-let property as a limited company? Read on to find out.

Advantages of buying a buy-to-let property through a limited company

The appealing tax benefit is one of the major reasons to consider purchasing a buy-to-let property through a limited company. Besides, there is lesser risk and limited liability if losses occur.

Tax benefits

When you purchase a property in your name, the tax regulatory organisations expect you to pay income taxes on the rental income. The HMRC categorises such money received for rent as personal income. The overall tax returns become higher if you have additional sources of income apart from the rental income.

In contrast, purchasing a buy-to-let property as a limited company qualifies you for lower tax payments because instead of classifying the rental income as an income tax, it becomes corporation tax for the limited company. For the 2021-22 tax year, the corporation tax rate was 19% compared to 20% income tax. This means there are savings to be had by setting up as a limited company to manage the property accounts.

Claim back your expenses

Private owners of rental property can sometimes have issues with claiming back their expenses such as mortgage interest. Rather than getting taxed on the rental profits, the complete rental income gets taxed.

The taxation process is different when you buy and register the rental property as a limited company instead of buying in your name. For limited companies, your expenses such as mortgage interest are classified under the business expenses. That gives you the possibility to claim back more expenses on your rental properties through a limited company structure.

Protect your assets

Another advantage of setting up a purchased property as a limited company is the protection of your personal finances should the investment go wrong. As the property owner, you enjoy limited liability against losses.

Imagine purchasing some buy-to-let properties worth less than the mortgage you took to fund the project, and the interest rates skyrocket. Paying back the mortgages becomes financially difficult and feels like a huge loss if the lender repossessed the property.

However, a limited company model would only see you lose the money made on that investment. Your other personal assets are protected from the bank provided they are not a part of the business investment or agreement.

While purchasing buy-to-let properties through the limited company structure protects your assets, be mindful of making personal business commitments on mortgages. Otherwise, they could be legally held against you when a loss is incurred. When in doubt, remember to see your accountant or financial advisor. The extra bucks spent on consultation can save your finances during investments.

Plan for the future

Avoid mistakes through detailed planning and calculations. Before investing in a buy-to-let property, confirm it is the best financial step for you with appropriate due diligence. You should also consider your future plans for ownership of the investment. That is why the decision to make purchases as an individual or through a limited company is dependent on personal goals and preferences.

For example, buying the property as a limited company structure is better if you’re going to eventually transfer ownership of the rental asset to a family. We suggest including your accountant or financial advisor in the planning stage as it is the foundation for your investment.

They can let you know whether it’s more straightforward to transfer a limited company to new ownership than passing on a private property in your name. It is also tax effective since the ownership of the company officially remains the limited company’s name but with a change in directorship. That further protects the handing over from tax returns like Inheritance Tax, Stamp Duty, and Capital Gains.

Disadvantages of buying through a limited company

Despite the numerous advantages, getting a buy-to-let property through a limited company is not all roses. You certainly enjoy limited liabilities on your investment compared to buying that property in your name but incur some unwanted costs or rates.

Disadvantages of a buy-to-let limited company property purchases include:

Additional costs

Whilst the tax benefits remain a significant factor in why many investors opt for purchasing buy-to-lets through a limited company, only a few people consider the additional costs of such a decision.

There are extra potential costs that you incur as a limited company investor such as Corporation Tax and the business administration time and costs needed to correctly file the accounts and articles of association for the business.

For example, property investors who use a limited company to invest in property will need to ensure they have funds available for:

  • Costs of keeping accurate financial records throughout the year
  • Costs of preparing and filing annual accounts at the Companies House
  • Legal fees
  • Accountancy fees if required
  • Corporation tax

Increased mortgage rates

Increased mortgage rates and higher interest rates are associated with buying a property as a limited company. Some lenders or financial institutions sometimes view lending to a company as a higher-risk investment compared to selling to an individual because of the limited liability the former enjoys.

Talking to a financial advisor and mortgage broker is a good way to evaluate and navigate the buy-to-let funding market. These experts will be able to give you an overview of the options available to you and point out ways to save money.

No Capital Gains Tax (CGT) allowance

Capital Gains Tax (CGT) do not apply to limited companies since they are subject to Corporation Taxes instead. Therefore, they miss out on the CGT allowance given to individuals who sell a buy-to-let property before it is time to pay Capital Gains Tax.

The allowance was valued at £12,300 in the 2021-222 tax year. In other words, individuals who sold a buy-to-let property were not taxed on the first at £12,300 profit made. It is a different scenario for limited companies as they are taxed on the entire profits.

However, there are some cases of limited companies that end up paying less taxes than private property investors. We also have individuals who take advantage of the Capital Gains Tax allowance to pay less on their rental properties. Talking to an accountant or financial advisor is the best way to decide what investment type will work best for you.

Getting a buy-to-let mortgage as a limited company

Certain conditions must be met before a loan application for a buy-to-let mortgage is approved. The criterion slightly differs if you are applying as an individual or limited company. It is even stricter for a limited company to get approvals on such loan requests because of the limited liability they enjoy.

It is a benefit when you consider how the personal assets of a director of a limited company are protected but a slight disadvantage to lenders who prefer individuals who are more responsible for losses incurred.

The following are some of the criteria that determine the response of most lenders to applications for buy-to-let mortgages from limited companies.

  • A new limited company is being started to purchase the property
  • An existing limited company is being used to purchase the property
  • An existing Special Purpose Vehicle (SPV) limited company is being used to purchase the property
  • A limited company with a personal guarantee
  • A limited company without a personal guarantee

For most lenders, your rental income must be a minimum of 125% of the monthly mortgage payment. That guarantees your ability to pay the mortgage and even have some left over to manage the property.

In addition, the maximum loan amount is 85% of the estimated property’s value for limited companies seeking mortgages to purchase a buy-to-let property. Experts call it the loan-to-value ratio and the percentage differs for separate lenders or financial institutions. Different lenders also have varying criteria and we recommend consulting a mortgage advisor during the application process.

Do limited companies pay stamp duty on buy-to-let properties?

As an investor, you should be ready to pay Stamp Duty Land Tax (SDLT) when purchasing buy-to-let properties as a limited company. For limited companies, there is also a second home surcharge of 3% on properties that exceed £40,000. It is mandatory regardless of whether it is the first property purchased by the company or not.

That might seem unfair to limited companies but has its advantages too. When a property is purchased by a limited company, the ownership is in the company’s name and not that of an individual, director or shareholder.

Therefore, future transfer of ownership is significantly easier than a privately owned property. There is no need for additional Stamp Duty, Capital Gains Tax or an Inheritance Tax in such a case. That explains why many investors prefer limited companies since they can plan retirement and transfer of ownership with ease.

Related questions

Can I live in a property owned by my limited company?

Generally, there is no restriction on staying in a property owned by your limited company although there are certain considerations. Firstly, you must ensure you are paying the rent at the market rate for properties owned through a buy-to-let mortgage. Failure to do that will qualify your stay as a benefit in kind that is subject to tax returns.

Furthermore, confirm the terms and conditions of your mortgage in case the lender explicitly forbids such accommodations. That is why you must read through the rental documents before the final agreement or when making decisions. We always advise investors to be cautious and consult professional accountants or qualified advisors.

Can I charge my limited company rent?

While it is not generally allowed, there are a few cases where you can charge rent to your limited company. That will involve a previously agreed rental agreement with clearly stated regulations.

The agreement must be formal for proper documentation purposes in case something happens. More importantly, reach out to a legal advisor before taking such steps. The fines for defaulting rental agreements can be severe and that is why you should be careful.

In summary

The choice to purchase a buy-to-let property either as an individual or through a limited company has its advantages and disadvantages to consider.

Buying as a limited company is the preferred choice for some people because of the obvious tax benefits and the protection of personal assets from losses if the investment goes wrong.

Purchasing a buy-to-let property through a limited company also incurs additional costs, significantly higher mortgage rates. The decision will depend on future plans for the property in terms of whether it will be passed on to family and friends as inheritance, sold on as part of the business, and how much involvement you want in the day to day management of the finance side of the investment.

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