Is it worth purchasing buy-to-let properties as a limited company?


With tax relief on buy-to-let mortgages in full effect, should landlords look at setting up a limited company for their property investments?

Landlords felt the pinch with the phasing out of income tax relief on buy-to-let mortgage interest and were forced to head back to the drawing board for a rethink. No longer could they rely on claiming hundreds and thousands of pounds against their tax each year.

The tax changes

Once upon a time, landlords were able to claim 100 percent of the interest on their buy-to-let mortgage. But 2015 saw then-chancellor George Osborne introduce new tax changes for landlords which came into effect in 2017.

The figured first dropped to 75 percent of claimable relief in 2017, with it reducing to 50 percent in 2018. This year (2019), the relief will go down to 25 percent, before 2020 sees it removed completely, with landlords only able to claim at the basic taxable allowance rate.

The UK Government says that 82 percent of landlords won’t be affected by the tax changes (those who are basic rate taxpayers). Even if their findings are ironclad, that still leaves 18 percent (360k) of landlords – those in the 40 percent tax bracket – in somewhat of a pickle.

If you’re a landlord who is feeling the pinch of new tax changes, do you grin and bear the additional tax or look for alternative ways to save on costs?


Exploration duties

The last couple of years have seen landlords exploring their options. And there are few on the table, from relatively straightforward choices such as increasing rent or going for a cheaper buy-to-let mortgage rates, to the option of owning property as a limited company.

Increase rent

The obvious go-to is to raise rents. However, doing so isn’t as cut and dry as it may seem at first. Increased rents mean more income, which means more tax. Yet with the uncertainty of Brexit lingering over the UK property market, many are reluctant to rock the boat and start charging their tenants more. That’s not to say rent increases should be avoided, but you need to look at all the particulars involved before deciding whether or not to increase the rent.

Cheaper buy-to-let mortgage rates

While you still won’t be able to claim interest relief on cheaper buy-to-let mortgages, your monthly payments will reduce which could help you save a bit of extra cash each month. The big B word (Brexit) also means that everyone is unsure about what will happen with interest rates, so locking into a lower rate could add an extra layer of stability.

Gifting your property

If you are married or involved in a civil partnership, you can gift a share of the property to your significant other if they are a basic rate taxpayer. Doing so would reduce your overall tax burden. However, this isn’t a decision that should be undertaken lightly.

Are you limited edition

There is one option that keeps popping up for landlords, which is to have investment properties registered to a limited company. Of course, a limited company would likely only apply to those in the higher tax bracket. Landlords paying basic rate tax could find themselves forking out more with a limited company.

Note: If you are unsure whether you fall into the basic or higher tax rate, it’s best to check with an account to be sure.

A limited company is more tax efficient as you pay Corporation Tax instead of Income Tax, which means that relief restrictions don’t apply. The main rate of Corporation Tax is currently 19 percent, and is set to drop to 17 percent for the tax year 2020/21.

There are other aspects to take into account: if you who already own property, you can’t simply move your investments over to a limited company. Doing so would incur stamp duty at 15 percent of current market values of the properties, and there could also be capital gains tax on any uplift in values.

There could also be early repayment costs on current buy-to-let mortgages as the new mortgage would need to be taken out under your limited company name. If you currently have buy-to-let properties, again it’s worth speaking to a tax professional as everyone’s circumstances differ.Buying new property as a limited company

While moving your current investment(s) to a limited company might come with its hurdles, purchasing a new property is more straightforward. Yet there are still a few things that you should keep in mind when going down this route.

  • Your options for getting a mortgage may be more limited, though the mortgage choices for limited companies are growing significantly – even if they’re not quite at the level as a personal buy to let mortgage.
  • Rates may also be higher, as the cheapest rates aren’t typically available to limited companies. However, it’s entirely dependant on the lender.
  • In terms of setting up a limited company, the process is reasonably straightforward, and new limited companies can apply for buy-to-let mortgages as long as they’re willing to provide a personal guarantee for the loan amount.

How do I set up a limited company for my property?

Most landlords setting up a limited company will do so as a Special-Purpose Vehicle limited company. Special-Purpose Vehicle’s are non-trading companies, as opposed to traditional limited, which acts as a trading company. A Special-Purpose Vehicle indicates that you are setting the company up for a specific reason (in this case, for property investment).

Lenders don’t tend to take fixed and floating charges (used to secure borrowing by a company) for Special-Purpose Vehicle limited companies, which is why landlords are encouraged to set up as one.

Is a limited company for me?

Whether or not landlords go down the route of acquiring property with a limited company comes down to their personal circumstances. Which is why it’s always good to have all of the information at hand, even if it’s just to provide more clarity. You shouldn’t make any concrete decision until you have spoken with a tax advisor, as they will be able to review your finances and provide direct advice.

Still, in these changing times for landlords, it’s better to have some options than none at all. And starting a limited company for your next property purchase could be the difference between paying more or saving on tax.


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