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
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
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
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
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
The Disadvantages of using a Limited Company for Buy to
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.
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
As always work your numbers and consult
professionals before you make a final decision.