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Buy To Let Limited Company Pros & Cons

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If you’re thinking about purchasing a buy-to-let property, you might be wondering whether you should purchase the property in your own name, or through a limited company. There are advantages and disadvantages of both options, which you’ll need to carefully weigh up before making your decision.

In this article, we’ll talk you through the pros and cons of each option, as well as how you can go about getting a limited company buy-to-let mortgage.

What is a limited company?

When you start a business, you can choose to trade as a sole trader, or to incorporate your business as a limited company. But what is a limited company and what sets this business structure apart from a sole trader?

A limited company is a legal structure that separates the responsibilities of the business’ owners (also known as shareholders) and the business itself. If a limited company is operating within the UK, it must be registered at Companies House.

When a limited company is incorporated, it becomes its own legal entity. This means that the business can have its own debts and assets. This means that if a limited company gets into debt, the directors and shareholders of that business cannot be held responsible and only stand to lose what they have invested into the company.

Purchasing buy-to-let property through a limited company is an appealing option to many people, as there are certain tax benefits, as well as the safety net of limited liability if things go wrong. But is this the best way to purchase a buy-to-let property, or should you purchase the property in your own name? Read on to find out.

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

Purchasing a buy-to-let property through a limited company is an appealing option for many people. This is because it provides many benefits to landlords, from tax benefits to protection from liability if things go wrong. Let’s take a look at some of the advantages of purchasing your buy-to-let property through a limited company.

Tax benefits

As a private landlord with a property in your own name, you will be liable to pay income tax on your rental income. This is because the money you receive for rent is viewed as personal income by HMRC. If you have another job, this could mean that your rental income pushes your income into a higher tax band, leaving you liable to paying a higher rate of tax.

Purchasing your buy-to-let property as a limited company could enable you to pay less tax. This is because rental income from properties owned by a limited company is subject to corporation tax, rather than income tax. This rate currently stands at 19% for the 2021-22 tax year, and there are no higher tiers. This means that for many people, it is more tax efficient to purchase your buy-to-let property through a limited company.

Claim back your expenses

If you own your rental property privately, you may not be able to claim back certain expenses, such as your mortgage interest. This means that you may be taxed on the full rental income, rather than just your profits.

However, expenses work differently when you own your rental property through a limited company. This is because expenses such as mortgage interest are classed as business expenses for limited companies. For this reason, you may find that you are able to claim back more expenses when you own your rental properties through a limited company.

Protect your assets

Setting up a limited company can also help to protect your personal finances in case anything goes wrong with your new property investment. This is because limited companies provide limited liability for their directors.

For instance, if you have buy-to-let properties that are worth less than the mortgage you’ve taken out to fund them or if interest rates rise making it difficult for you to pay your mortgages, there is a chance that your lender will repossess the property. If this happens, you will lose money on the investment you’ve made, but your other assets will be protected against being taken by the bank, as long as they are held outside of any business investments.

However, it’s important to note that you will be held personally financially responsible for any personal guarantees that you provide for mortgages. If you’re unsure, it’s always best to check with an accountant or financial advisor.

Plan for the future

It’s always important to think about the future, to avoid making mistakes that you later come to regret. Investing in buy-to-let property is no different, which is why you need to think now about your future plans. This includes what you plan to do with your buy-to-let properties in later life.

If you plan to transfer ownership of your rental properties to family in the future, a limited company could make this process easier. That’s because it’s simpler and more tax efficient to transfer a limited company into new ownership than it is to pass on a property. This is because the property will remain in the ownership of the limited company, and it is only the directorship of that company that changes hands. This can potentially protect the transaction from being subject to Inheritance Tax, Stamp Duty and Capital Gains Tax.

disadvantages of buying through limited company

Disadvantages of buying through a limited company

However, there are also some disadvantages of using a limited company to invest in property which you should consider before taking this route. Let’s take a look at some of the disadvantages of purchasing rental properties through a limited company.

Additional costs

Many people choose to invest in property through a limited company due to the tax benefits. However, it’s important to note that you will face some additional costs when you purchase property through your limited company, so you’ll need to weigh these up.

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

  • Corporation Tax
  • Keeping accurate financial records throughout the year
  • Preparing and filing annual accounts at Companies House
  • Filing a return at Companies House
  • Legal fees
  • Accountancy fees if required

Increased mortgage rates

Before you can invest in property, you’ll need to think carefully about how you plan to fund your purchase. In the majority of cases, a mortgage will be required to pay for the initial purchase of the property.

Whilst limited companies are able to take out mortgages in the same way that an individual is able to, you’ll find that many lenders will charge higher interest rates for the privilege. This is because the banks see lending money to a company as more risky than an individual, due to their limited liability. So, if you plan to take out a mortgage on your rental property, you’ll need to be prepared to pay a higher rate of interest on your mortgage if you purchase it through a limited company.

No Capital Gains Tax (CGT) allowance

Capital Gains Tax, often abbreviated to CGT, is the allowance that is given to individuals who sell a buy-to-let property before they have to pay Capital Gains Tax. In the 2021-22 tax year, this allowance sits at £12,300. This means that if you receive any profits from selling a buy-to-let property as an individual, you would not be taxed on the first £12,300.

However, Capital Gains Tax does not apply to limited companies. Instead, limited companies are subject to Corporation Tax when profit is taken out of the business. This means that limited companies do not receive this allowance, so are taxed on the entirety of the profit.

Whilst some property investors find that they pay less tax as a limited company, others may be better off by owning their rental properties as an individual. If you’re unsure, it’s always best to consult with an accountant or financial advisor who will be able to talk you through your options.

buy to let mortgage as limited company

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

Individuals, companies and limited liability partnerships can all apply for a buy-to-let mortgage, but it is important to note that they each come with their own set of criteria that must be met before a loan application is accepted by the lender.

Although the criteria of lenders is stricter when you apply for a buy-to-let mortgage as a limited company, it can be more beneficial in some situations. For example, as the director of a limited company, you are not held personally responsible for any debts that your company owes, so your personal finances are protected.

When applying for a buy-to-let mortgage as a limited company, you’ll find that most lenders will consider the following criteria:

  • 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

In the majority of cases, your rental income will need to be at least 125% of the monthly mortgage payment. This ensures that you will be able to pay the mortgage, as well as having money left over to maintain the property.

When you get a mortgage for a buy-to-let property through a limited company, the maximum that you will be able to borrow is 85% of the value of the property. This is known as the loan to value ratio. However, the criteria of each lender will vary, so it’s always best to check with your lender or mortgage advisor.

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

When you are purchasing a buy-to-let property through a limited company, you might be wondering whether you will be required to pay Stamp Duty Land Tax (SDLT). The answer to that question is yes, limited companies are liable to pay Stamp Duty in the same way as an individual. However, a limited company will also need to pay the second home surcharge of 3% on properties over £40,000. This applies whether or not the property is the first property that has been purchased by the company.

However, there are some benefits of purchasing a property in this way. If a property has been purchased by a limited company, the property is then owned by the company rather than the individual. This means that if you want to transfer ownership of that property, for example upon your retirement, you can simply transfer ownership of the limited company. This means that you may not need to pay Stamp Duty, Capital Gains Tax and Inheritance Tax.

Related questions

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

It is possible to live in a property that is owned by your limited company, but it is always best to seek advice from a qualified accountant before doing so. If the property is owned through a buy-to-let mortgage, you will need to ensure that you are paying rent at the market rate. Otherwise, it may be seen as a benefit in kind that is subject to taxes. You’ll also need to check the terms and conditions of your mortgage, as some lenders will expressly forbid this. Ultimately, it’s always best to be cautious and seek qualified advice before making any decisions.

Can I charge my limited company rent?

There are some circumstances in which you may be able to charge rent to your limited company. However, in the majority of cases, this would not be allowed. If you do decide to charge your limited company rent, you’ll need to have a formal rental agreement drawn up. It’s best to seek legal advise before doing so, to ensure that you stay on the right side of the law and avoid any potential fines.

In summary

When deciding whether or not to purchase buy-to-let properties through a limited company, there are several issues that you’ll need to consider. If you decide to buy in the name of a limited company, this can be beneficial in some circumstances but may also have some disadvantages when compared with direct ownership.

In this article, we’ve explored the pros and cons of buying a buy-to-let property through a limited company, as well as discussing the facts when it comes to limited company buy-to-let mortgages. As always, it’s best to seek advice from a qualified accountant or financial advisor before making any decisions, to ensure that you are doing the right thing for both your finances and your business.

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