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Investing in buy-to-let (BTL) property can be a lucrative business and it can create financial security. You can choose to own a rental property as a private landlord or you might prefer to set up a limited company to run your business. This guide explains the differences between the two so you can decide which option is best for you.
What is a buy-to-let property company?
A buy-to-let property company is a limited company through which you buy rental properties.
If you’re a landlord, you have two choices – you can buy properties as an individual and pay income tax, or you can buy them through a limited company and pay corporation tax.
Many landlords choose to set up a limited company for their buy-to-let portfolio because it can be more tax efficient. Landlords also receive their rental income differently as it belongs to the company. This enables you to either pay yourself a salary from the company or take your rental income as dividends.
What are the pros and cons of setting up a property company?
Before you decide whether setting up a property company is right for you, it’s important to weigh up the pros and cons, as we’ve outlined below:
Pros
- Setting up a limited company means you’ll pay corporation tax which can be lower than individual income tax rates
- If you have a limited company, your investment property becomes legally separate from your personal affairs which means you are no longer personally liable for any losses
- The restrictions on buy-to-let mortgage interest tax relief don’t apply to limited companies
- Transferring a property between companies could mean you don’t need to pay stamp duty, inheritance tax or capital gains tax.
Cons
- There are additional administration considerations and costs, including filing company accounts
- There are costs involved in transferring existing properties owned by an individual into a limited company
- There are fewer buy-to-let mortgages for limited companies, although this is improving
- You might need to seek advice from a broker or accountant and this will add to the costs.
How to set up a property company
If you decide that you want to set up a property company, your first step is to register with Companies House. It costs £12 to submit your registration online and you can pay by debit or credit card. Your company will usually be registered within 24 hours.
You will also need to create a company name which must be unique and not too similar to an existing company. It must also not be misleading. Additionally, you will need to provide an address for your company, which could be your place of business or your home address, and you will need to appoint directors and shareholders and describe what your business does.
If you’re registering online, you can register for corporation tax at the same time. If not, you must do this within three months of starting to trade so that you can file your company tax return each year.
Limited companies should also set up a business bank account as this will ensure you keep your business and personal finances separate. Keeping accurate records will help you file your accounts and tax returns on time.
Tax on rental income can be complex, so it’s important to make sure you know what’s what. If you are a private landlord, tax is charged depending on the band your income falls into:
- Your personal allowance means you pay nothing on earnings up to £12,750
- The basic rate of 20% is payable on income between £12,571 and £50,270
- The higher rate of 40% is payable on income between £50,271 and £150,000
- The additional rate of 45% is payable on income over £150,000.
By contrast, if you’re a limited company, until April 2023, you’ll pay corporation tax at a flat rate of 19%. The top rate of corporation tax (on profits over £250,000) will rise to 25% in April 2023.
Companies with taxable profits below £50,000 will still pay the current rate of 19%. Businesses with profits of between £50,000 and £250,000 will be charged between 19% and 25% based on how much marginal relief they can claim. You can find out more about this on the gov.uk website.
What are the buy-to-let tax changes I need to consider?
Some significant tax changes came into effect in April 2017 that have prompted many landlords to go down the limited company route.
Before April 2017, landlords could deduct 100% of mortgage interest from rental income to reduce their tax bill. However, buy-to-let mortgage tax relief has gradually been phased out, and since April 2020, landlords have instead received a tax credit based on 20% of their mortgage interest payments. This means landlords paying income tax are no longer able to deduct costs from their tax bill and they now only receive 20% of their mortgage interest cost back.
How the tax changes affected lower-rate taxpayers
The table below outlines the difference in tax bills for a lower-rate taxpayer before and after the changes came into effect.
| Year | 2016-17 (before) | 2020 onwards (after) |
| Annual income | £10,000 | £10,000 |
| Mortgage interest | £6,000 | £6,000 |
| Allowable relief | £6,000 | £0 |
| Total rental income on which tax is paid | £4,000 | £10,000 |
| Tax at 20% | £800 | £2,000 |
| 20% tax credit | n/a | £1,200 |
| Total tax payable | £800 | £800 |
In this example, a basic-rate taxpayer will not be hit with a higher tax bill as a result of the new changes.
How the tax changes affected higher-rate taxpayers
The table below outlines the difference in tax bills for a higher-rate taxpayer before and after the changes came into effect.
| Year | 2016-17 (before) | 2020 onwards (after) |
| Annual income | £15,000 | £15,000 |
| Mortgage interest | £10,800 | £10,800 |
| Allowable relief | £10,800 | £0 |
| Total rental income on which tax is paid | £4,200 | £15,000 |
| Tax at 40% | £1,680 | £6,000 |
| 20% tax credit | n/a | £2,160 |
| Total tax payable | £1,680 | £3,840 |
In this example, a higher-rate taxpayer is now paying more than double the amount of tax they were before the new rules kicked in.
What tax relief is there for buy-to-let landlords?
If you choose to buy properties through a limited company, the main tax relief is that you can claim mortgage interest as a business expense – so you can continue to declare rental income after deducting the mortgage.
This means that if you’re a higher-rate or additional rate taxpayer, running a limited company is likely to reduce your tax bill. But exactly how big the savings will be will depend on your situation. Be aware that mortgage rates for limited companies can be higher than they are for private landlords, so any tax savings you make could quickly be eroded.
However, limited companies can also benefit from inheritance tax relief if you are thinking about passing on property to your family in the future.
Is property subject to CGT?
As a private landlord, if you sell a property, you will need to pay Capital Gains Tax (CGT) above the current allowance of £12,300. This allowance is being reduced to £6,000 in April 2023 and then £3,000 in April 2024.
By contrast, if you have set up a limited company to buy property, you won’t have to pay CGT. Instead, you will need to pay corporation tax as it’s seen as taking profit out of your business. It can be sensible to consider whether it would be cheaper to pay CGT or corporation tax depending on how much profit you are likely to make from selling property.
Should you set up a limited company to buy property?
This is ultimately your decision to make so it’s worth taking the time to assess the pros and cons and carry out some research to decide whether it could work for you.
Landlord tax changes certainly make setting up a limited company more appealing, particularly if you’re a higher-rate taxpayer and own a number of properties. Plus, you’ll pay corporation tax rather than individual income tax.
However, you also need to remember that there will be a lot more admin involved and you’ll need to hire an accountant. There will also be fewer mortgages to choose from and rates could be higher.
If you not sure which choice is right for you, it can be sensible to talk to a financial adviser who can help discuss your options.
How do I get funding to start a buy-to-let company?
There are several options available when considering how to fund your new business.
One of the most popular options is a business loan. Business loans let you borrow a lump sum of money, often between £1,000 and £3 million, and you then repay this amount in monthly instalments, with interest added on top. To get a business loan, you will need to have a solid business plan that outlines your goals for the business and how you will use the funds to achieve them. For commercial properties, commercial mortgages are an attractive lending option.
Many mainstream banks offer unsecured business loans, which means you can borrow money without securing it against any business assets. You can usually borrow more with a secured loan, but you will need to secure the amount borrowed against an asset, such as property. Should you be unable to repay your loan, the lender can sell your asset to recoup the cost of the loan. Because the loan is less risky for the lender, interest rates can be more competitive.
Startup loans are also available for businesses that have been trading for no more than 36 months. The main source for startup loans is the UK government-backed startup loan scheme.
If you’re not sure which type of funding is best for your business, the team of experts at Swoop will be happy to discuss your options and help you find the most appropriate solution. Register with Swoop to get started.
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