Buy to Let Through Limited Company vs Personal Ownership

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When considering purchasing investment property, the choice between personal ownership and a limited company structure is pivotal. This decision holds considerable sway over your financial outcomes and investment objectives. Here, we’ll explore the pros and cons to aid your decision-making process.

Ltd vs personal: what’s the difference?

Whether you’re entering the property market for the first time or already an established landlord, understanding the distinctions between purchasing an investment property personally versus through a limited company is essential. Opting for personal ownership exposes you to direct liability for debts and legal matters, alongside personal income and capital gains taxes. On the other hand, acquiring property through a limited company establishes a distinct legal entity, mitigating personal liability while introducing additional administrative responsibilities and subjecting profits to corporation tax. Delving into the tax implications of each approach is crucial for making a well-informed choice.

Examples of tax paid on investment property

The table below outlines the key property taxes that both private and limited company landlords need to know about:

Property investment Stage	Tax	Personally Owned	Limited Company
Buying	Stamp Duty Land Tax	3% surcharge	3% surcharge
Selling	Capital Gains Tax	£0 – £6000 Tax free Gains over £6000 – Basic rate taxpayer: 18% Higher & Additional rate taxpayer: 28%	19-25% (Corporation tax) Based on pre-tax profits
Letting/ generating revenue	Income tax	£0 – £12,570 Tax free 0% £12,571 – £50,270 Basic rate tax payer: 20% £50,271 – £125,140 Higher rate tax payer: 40% £125,141+ Additional rate tax payer: 45%	19-25% (Corporation tax)
Estate planning	Inheritance tax (IHT)	40% above £325,000 7 year taper on gifts	Same but on value of shares held

Buying property personally

Opting to invest in property personally entails registering the property deeds and mortgage under your individual name. Any profits generated from your buy-to-let property will be subject to personal income tax, calculated by subtracting allowable expenses from rental income. The resulting amount is then taxed at your standard income tax rate.

The following table shows the Income Tax rates and bands:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	over £125,140	45%

Under Section 24, landlords are no longer permitted to deduct mortgage interest as an expense for personally owned properties (except for Furnished Holiday Lets). Consequently, individuals falling within the higher or additional tax brackets will face a heightened tax burden. The amendment entails a 20% reduction in tax liability concerning mortgage interest payments and associated financing costs, including mortgage broker fees.

Buying property in a limited company

Opting to invest in property through a limited company involves ownership of the company, which, in turn, owns the properties. The company acquires buy-to-let properties, manages mortgages, and is liable for corporation tax on any generated profits.

Profits for the company are calculated by deducting allowable expenses from rental income, akin to other property ownership structures. Notably, within a limited company, the entire mortgage interest payment is tax deductible, thereby reducing the taxable profit and subsequent tax liability. Retaining profits within the company, such as for future property ventures, incurs no additional tax obligations.

Advantages of buying property through a limited company

Investing in property through a limited company can offer several advantages, particularly for higher rate taxpayers and those aiming to expand their property investment portfolio. Here are some key benefits:

Tax Efficiency:

Owning properties within a limited company allows for lower tax rates, resulting in greater retention of profits. Unlike personal income tax rates, which can be high for higher rate taxpayers, rental profits within a limited company are subject to the lower corporation tax rate. This can lead to significant tax savings, enhancing long-term profitability.

Financial Flexibility:

As a director of a limited company, you have more options for managing profits. Whether reinvesting in additional properties, contributing to pensions, distributing profits via tax-efficient dividends, or receiving a salary, you have greater control. Repayment of loans made to the company, such as property deposits, can also be tax-free from available company funds.

Portfolio Growth:

Retaining profits within the company allows for funding future property acquisitions without immediate income tax implications. This facilitates faster portfolio expansion and offers flexibility in investment decisions.

Inheritance Planning:

Property ownership within a limited company provides avenues for effective inheritance tax planning. Transferring business ownership to family members becomes simpler. Additionally, property held by the company may be shielded from stamp duty, inheritance tax, and capital gains tax, bolstering asset protection strategies.

Disadvantages of buying property through a limited company

While purchasing property through a limited company can have its advantages, it may not be the ideal choice if you’re only planning to rent out one or two properties. There are also potential drawbacks to consider before making a decision. Here are some key disadvantages:

Capital Gains Tax:

Selling a property through a limited company incurs corporation tax on all profits from the sale. The amount owed depends on the company’s taxable profits for the year, factoring in allowable expenses and deductions. In contrast, owning property personally subjects you to capital gains tax only on gains exceeding the £6,000 tax-free allowance.

Dividends and Double Taxation:

Taking profits out of a limited company often involves distributing dividends, which are typically more tax-efficient than salaries. However, be wary of double taxation. This occurs when the company pays corporation tax on profits, and shareholders are taxed again on dividend income received. While there’s a tax-free dividend allowance of £1,000, any dividends beyond this amount are taxable based on your Income Tax band, determined through a Self Assessment tax return annually.

Tax is paid on any dividends received over £1,000 at the following rates:

Tax Band	Tax rate on dividends over the allowance
Basic rate	8.75%
Higher rate	33.75%
Additional rate	39.35%

Taxation of dividends can be intricate and varies based on individual circumstances. It’s crucial to assess the implications of using a limited company and consult with tax professionals.

Mortgage Rates and Options:

Securing a buy-to-let mortgage through a limited company tends to be more expensive and convoluted compared to individual landlord arrangements. Lenders perceive it as riskier and more administratively complex, leading to higher rates, fees, and deposits for limited companies. Despite the initial cost, many landlords opt for this route due to its long-term tax advantages, potentially yielding higher profitability.

Complex Accounting and Reporting:

Limited companies must maintain accurate financial records, documenting all property-related income and expenses meticulously. This includes rental income, property management fees, maintenance costs, and more. Additionally, they’re obligated to compile and submit annual accounts and corporation tax returns to HMRC, a process that can be daunting and time-consuming, especially for those unfamiliar with the requirements and deadlines.

Navigating the tax implications of buy-to-let property purchases can be daunting and vary from individual to individual. We strongly recommend seeking independent tax advice from specialists before making significant investment decisions.