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April 29th 2019

Buy to let using a limited company: the pros and cons

In the last two years a series of new tax measures have come into force designed to reduce the attractiveness of buy to let activities for the private individual. This has prompted many private landlords to consider whether to invest through a limited company, instead of directly.

There are various advantages and disadvantages to using a limited company for buy to let, including those below.

Advantages

One advantage of a limited company structure is that the amount of mortgage interest (and other finance costs) that buy to let investors can offset against income has been restricted since April 2017. The more highly leveraged the investor is, the greater the potential benefit of using a limited company structure. No such restriction applies to companies.

The restrictions are being introduced in stages; by April 2020, the private individual will get a flat rate deduction of only 20% of finance costs against their tax bill, resulting in higher tax bills and pushing more private landlords into the higher rate tax bracket. Note that the restriction does not apply to furnished holiday let or commercial property income.

If a gain is made when a buy to let property is sold, a tax charge may arise. Although companies (unlike individuals) do not benefit from an annual exemption for chargeable gains, the rate of corporation tax paid by companies on gains is only 19% (soon to drop to 17%), whereas the rates of capital gains tax paid by individuals on the disposal of residential properties are 18% and (for higher rate payers) 28%.

As the corporation tax rate is significantly lower than income tax rates, more income generated by buy to let activities can potentially be retained if generated within a limited company structure, enabling the corporate buy to let investor to build cash and therefore increase the portfolio more quickly.

Disadvantages

In most cases, a company is liable to pay the stamp duty land tax/ land & buildings transaction 3%/ 4% supplement when it acquires a residential property – even if the company has no existing interest in a residential property. A private individual, by contrast, will not be liable for the supplement in a wider range of circumstances (for example if they rent their own home and they are making their first buy to let investment).

Generally speaking the buy to let mortgage market for private individuals is more mature than for the corporate market, consequently there is much less choice of mortgage products for the limited company buy to let investor, and the rates tend to be higher for otherwise comparable products.

Forming a limited company to operate a buy to let portfolio definitely adds extra layers of complexity; a limited company is separate “legal being”, and the activities of the company should be separated out from the owner’s personal affairs.

The company itself will be liable to pay corporation tax on its profits and gains; consideration must be given to how the owner will extract profits from the company (or whether to leave the profits in the company to pay down debt or expand the portfolio); and the owner may still have an obligation to file personal Self Assessment tax returns, if they draw an income from the company, for example in the form of dividends.

Operating a limited company also brings additional legal and administrative responsibilities; accounts have to be prepared in accordance with the Companies Acts and filed with Companies House annually; corporation tax returns have to be filed with HMRC.

Companies holding investment properties worth more than £500,000 may also be subject to the annual tax on enveloped dwellings.

Existing portfolio?

Existing buy to let investors who are considering moving their portfolios into a limited company structure are advised to seek professional assistance as there is a number of significant tax traps that await, particularly capital gains tax and stamp duty land tax/ land & buildings transaction tax traps.

Contact us today to discuss your requirements and see how we can help.

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