If you are a private landlord owning multiple properties, you will be paying tax via your self-assessment tax return at your marginal rate of tax, this could be up to 45% if you’re an additional rate taxpayer. This tax is due on your profits (income minus expenses), and mortgage interest is not an allowable expense, but you can claim a basic rate deduction.

There are several benefits and drawbacks of transferring a property into a limited company set up and in this blog we will look into them.

Pros:

• If you set up a limited company, you will only pay tax on your profits at the corporation tax rate of 19% (from April 2023, this could be up to 25% depending on profits), as opposed to income tax rates of either 20%, 40% or 45%.
• Limited companies aren’t restricted by the S24 interest relief, this means you can reclaim 100% of your mortgage interest.
• If you set up a family investment company, your company can be used to pass the properties down to your children, this can eliminate inheritance tax.
• If you are a higher-rate taxpayer, when you sell a property you will pay Capital Gains Tax at 28% but through a limited company you will only pay Corporation tax at 19-25%.

Cons:

• You must transfer the property to the company at its current market value and this attracts other costs such as Capital Gains Tax and Stamp Duty Land Tax.
• There may be additional administrative fees in the running of a buy-to-let company – all of which are allowable expenses against corporation tax.
• Once the company owns the property, the rental income is owed to the company and this is no longer your personal income, of course this can be taken out from the company using a salary and dividends if the profits are available, however, personal tax would be due on this income.
• You may find it harder to find a suitable lender, there may be higher interest rates involved and they may still want a personal guarantee from directors.
• If you are a basic-rate taxpayer, when you sell a property you will pay Capital Gains Tax at 18% but through a limited company you will only pay Corporation tax at 19-25%. You will also lose your Annual Exempt Amount of £6,000 for Capital Gains Tax.

Conclusion:

If your plan is to hold the property for a long-term profit or savings tool, the pros and cons would need to be viewed on a case-by-case basis and it’s, therefore, important to have all the information before making this decision.

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