Buy to Let Properties – Buying through limited company vs personally

There has been a large increase in the number of landlords purchasing a property in limited companies rather than personally in the past few years. This is mainly due to the changes in finance relief available for buy-to-let properties as set out in the 2017 budget.

In this blog, we detail the key differences in tax treatment for the two options;

Personally

Profits from renting will be liable to tax at your marginal rate of income tax, 20%/40%/45%.

From 2020/21 you will not be able to claim 100% finance cost relief when renting out the property. All financing costs you incur can be claimed as a basic rate (20%) reduction from your income tax liability.

On the sale of the property, the gain will be subject to capital gains tax at 18%/28%, however, there is an annual exemption allowance – currently £12,000.

Through the LTD

If you choose to invest a property in your limited company, the profit you make will be liable to Corporation Tax instead – currently 19%. You will also receive 100% finance cost relief.

You will pay income tax on money extracted via dividends at a rate of 7.5%/32.5%/38.1%.

Dividends below the dividend allowance of £2,000 are tax-free.

Companies do not pay Capital Gains Tax, they only pay Corporation Tax, and so gains are taxed at 19%. Unlike individuals, companies do not have an annual allowance for Capital Gains Tax. Therefore, the advantage in this situation depends on the amount of the gain. 

The main difficulty you might come across is finding a suitable lender; the majority of buy to let lenders will not lend to limited companies and instead want a personal guarantee from the directors. You may also come across higher interest rates and lower loan to value ratios.

Conclusion

It may be more beneficial for the property to be bought in a limited company if the plan is to hold the property and profits for the long term. However, if the rental income is needed for day-to-day living, you may want to consider how you will draw the money from the company because this may offset the tax savings you have made putting the property in the company in the first place.

Notes:

Tax savings are affected by other income and will depend on your personal circumstances.

If you wish to transfer currently owned properties into a limited company you will also be liable to sale and repurchase costs.

Rules are always subject to change and are not set in stone.

If you have any questions
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You may also like…

Restrictions on finance cost: landlords
First-year allowances
Allowable expenses
Changes to Capital Gains tax
Inheritance tax planning
Undeclared rental income

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