Purchasing A Buy To Let Property Through A Limited Company

This is a hot topic.

Many property investors want to build a buy to let portfolio to generate passive income.

I have done this and it makes a lot of sense.

But things changed dramatically when the government made changes to mortgage relief and stamp duty that made going down the buy to let route a lot less attractive.

Since these changes there has been a significant increase in the number of limited companies set up to purchase buy to let properties. In fact mortgage brokers now report that 80% of the new mortgage applications that they receive for buy to let properties are now made by limited companies.

In this post I want to address whether this is a good move or not. I will present you with the pros and cons and then you will need to decide if it is the right fit for you or not. The limited company that you will need to set up is an SPV (special purpose vehicle) and I explain this in detail in a previous post so make sure to read this.

Is a Limited Company good for Flipping?

Before we get into the buy to let details, it is worth me explaining why it could be of benefit to you to use a limited company for flipping. To be clear, flipping is where you purchase a property, renovate it and then sell it at a profit.

If flipping is your chosen strategy then purchasing property through a limited company makes good sense. The reason for this is the difference in taxation levels. When you flip a property as a limited company then any profits are subject to corporation tax in the UK which is currently at 19%.

As an individual flipping a property your profits are regarded as income by HMRC and you will have to pay tax at your current rate. If you pay a basic rate of tax then this will be 20% (still 1% higher than corporation tax) and if you pay a higher rate of tax then this is 40% which is significantly higher than the corporation tax rate.

There is one way that you can reduce your tax liability as an individual and that is by getting the profit that you make on the flip seen as a capital gain rather than income. To do this you have to prove that you intended to rent out the property for a while or actually do that for a short period before you sell (use a friend or a relative here).

This can get a bit complicated and if you flip a lot of properties and try to use the capital gains method all of the time then the HMRC are going to smell a rat and may come down on you like a ton of bricks.

The Advantages of Purchasing Buy to Let Properties through a Limited Company

There are three main advantages to purchasing buy to let properties through a limited company. The first of these is the way that profits are taxed. If you purchase a buy to let property as an individual then the income generated from renting the property forms part of your earnings and is taxed at your normal personal rate.

If you use a limited company then the income earned through renting is liable for corporation tax which as I have explained above is significantly lower at less than half of the higher rate tax payer level.

You need to be aware that if you take dividends out of your limited company then you will have to pay tax on these. But you do have some flexibility here as you can time your dividend payments to make them tax efficient.

You could pay the dividends to members of your family that are basic rate tax payers so that they will only pay 20% tax. Alternatively you could forget about dividends and just use the profits to purchase your next buy to let property through your limited company.

The second advantage to purchasing your buy to let properties using a limited company is taxation on mortgage interest. As an individual property investor you will not be able to claim mortgage interest as an allowable expenditure to offset your tax bill after April 2020 (you will be able to claim an allowance at the basic rate of tax but this is not as good).

With a limited company you can still claim mortgage interest as an allowable expenditure to offset your corporation tax bill. The bottom line here is that if you purchase as an individual and you pay the higher rate of tax, having a mortgage for your buy to let property will mean that you will have to pay more tax than if you used a limited company.

The third advantage that a lot of property investors are not aware of is that you will have some additional options when it comes to inheritance taxation. This is a complex area and you will need professional advice here but there are a number of methods that you can deploy to lessen your exposure to inheritance tax.

It all sounds great doesn’t it? Well unfortunately there are some disadvantages to purchasing your buy to let properties using a limited company as well. You just knew this was coming didn’t you?

The Disadvantages of using a Limited Company for Buy to Let Purchases

The biggest disadvantage with using a limited company for buy to let purchases is the availability of mortgages. The good news is that this is changing as more and more finance companies realise that there is a market for limited company mortgages.

Even though there are more lenders offering buy to let mortgages for limited companies you will still be scrutinized as an individual financially. Most lenders will want you to provide a personal guarantee as well so you will really end up with a personal mortgage that just has a different label on it. At the time of writing the costs of these mortgages was higher as well.

If you plan to take money out of your limited company in the form of dividends for living expenses then HMRC class this as personal income and you will have to pay tax on this. So you can end up in a double taxation nightmare here. First you have to pay corporation tax and then personal tax on the dividends.

So if your intention is to live off the rental earnings from your buy to let properties then you will need to calculate whether using a limited company is worth it or not. You will save in taxation in some ways and have to pay more in others.

The final disadvantage is not really a major one but you will have to file company accounts and this means paying your accountant more for this work. There will also be more paperwork for you to deal with so you need to consider that as well.

Should you use a Limited Company?

It depends on a number of factors. If you are at the high level tax bracket and you do not have someone (maybe your spouse) who is at the lower tax bracket then it will be very tempting for you to want to pay the lower corporation tax.

Set up company by Giles Turnbull

What you do need to take into consideration is that as you are building your buy to let portfolio through a limited company you could create a tax loss on paper as opposed to a profit so you could plan a delay in the taxable gains until you reach retirement or you have a fall in income.

If you rely on the rental income from your buy to let properties to live on then a limited company may not be the right solution for you. If you are happy to let profits roll up and then use these to purchase more properties then a limited company is a good idea.

Using mortgages to acquire buy to let properties is probably best done through a limited company. There are more offers available now than there used to be and you can claim the interest as an expense against corporation tax.

Think about your exit strategy. Do you plan to eventually sell off all of your properties so that you can sail around the world? Or do you want to pass on your property portfolio to your children? If you want to pass on your portfolio then a limited company can help you save on inheritance tax.

As always work your numbers and consult professionals before you make a final decision.

About The Author

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top