How A Buy-to-Let Limited Company Works

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Considering setting up a limited company for your property investments? With changes like the phasing out of mortgage interest relief, many landlords are exploring this option to optimize their portfolios. While it’s gaining popularity, there are drawbacks to consider. Is it the right move for you? Let’s delve into the pros and cons.

What are the tax benefits of setting up a limited company?

Opting for a limited company structure for your rental property can be a strategic move. By transferring legal ownership to the company, you sidestep income tax on rental profits and instead face corporation tax, currently at 19% but slated to rise to 25% in 2023. This shift particularly benefits higher earners in the 40% tax bracket, offering potential significant reductions in their tax liabilities.

Can I offset my mortgage payments in a limited company?

A significant change impacting investors is the elimination of Section 24 mortgage interest relief, meaning landlords in the UK no longer receive tax relief on their buy-to-let property mortgages. The current arrangement grants a 20% tax reduction on mortgage interest costs, resulting in increased tax payments for buy-to-let investors. Opting for a limited company structure offers a workaround, as it remains unaffected by the challenges related to mortgage interest relief. In this setup, all mortgage interest costs can still be offset against the rental income from the property portfolio.

Do I still need to pay stamp duty if I set up a limited company?

Certainly. Stamp duty tax is an unavoidable reality, applicable to property acquisitions, whether under personal ownership or within a limited company structure. In both cases, the property is subject to Stamp Duty Land Tax, along with the additional 3% surcharge for second homes.

How to set up a limited company?

In the UK, registering a limited company is a straightforward process through Companies House, with the company details accessible to the public. This involves a nominal fee and the provision of essential information, including director signatures. However, before proceeding, consulting with a solicitor and accountant is advisable. Ongoing obligations include submitting annual accounts, notifying changes, and managing additional paperwork, such as PAYE salary schemes, corporation tax returns, and workplace pensions if applicable. Engaging a proficient accountant is crucial for handling these tasks, and it’s essential to consider associated fees when contemplating incorporation. It’s important to note that this overview is not exhaustive, and seeking independent financial advice on the tax implications of establishing a limited company is recommended.

Drawbacks of setting up a limited company

Limitations on mortgage availability – A reduced pool of mortgage providers limits your options. Engaging a skilled mortgage advisor aids in securing optimal deals.
Disclosure – While not dire, companies must divulge comprehensive business information, including profits, salaries, and margins.
Cost of transferring properties into the company – For existing property owners contemplating the shift to a limited company, the process involves sale and purchase steps. This incurs capital gains tax and stamp duty expenses, urging careful consideration of potential savings.

Does a limited company pay stamp duty on property?

Incorporating a property portfolio does trigger stamp duty and capital gains tax charges. It involves a legal transfer of ownership from an individual to a separate entity, leading to potential double taxation. Stamp duty is unavoidable and is calculated based on the market value.

Can limited companies get buy-to-let mortgages?

Yes, limited company mortgages for buy-to-let are niche and often have higher fees. Directors personally guarantee the loan, making them liable for the debt if the company misses a repayment. Independent advice is crucial to fully understand the risks before making any decisions.

So, should I set up a limited company for my buy-to-let?

In general, if you have only one or two properties, keeping them in your personal name as a sole trader may work better. However, if you’re approaching the £50,000 tax threshold or planning a large portfolio, exploring a limited company structure might be worthwhile. It’s important to note that this is not tax advice, and tax rules are complex. It’s advisable to discuss your individual circumstances with a professional tax advisor.