The number of landlords running a limited company buy-to-let has sky-rocketed over the past few years, so is it something all property investors should consider?
The latest research shows that a total of 615,077 properties are limited company buy-to-lets, which a huge 82% rise compared with the end of 2016. What’s more, more limited companies for buy-to-lets were set up in 2023 than any other year, showing a trend that is accelerating across the board.
The Hamptons data also shows that the move is becoming increasingly popular among smaller landlords, with a 22% rise in the number of companies holding a single property last year.
At the time the data was released earlier this year, it was described as a “long-term commitment from landlords” looking to remain and thrive in the private rented sector, according to Hamptons head of research Aneisha Beveridge.
However, despite the surge in popularity, setting up a limited company buy-to-let comes with certain considerations, and it will not necessarily be the most cost-effective option for every landlord.
Why set up a limited company buy-to-let?
- One of the reasons people set up a limited company for any purpose, whether a property investment or something else, is the offer of the ‘limited liability’ protection that comes with it. This means that the company is an entity in its own right, and means you are not personally liable for any financial losses made by the business.
- A limited company also exists beyond the life of its shareholders. Therefore, if one shareholder (the landlord) retires or resigns or passes away, the company will continue to exist and operate, along with any properties owned by the company, which could protect it from certain taxes such as inheritance tax.
- For property investors specifically, the appeal of the tax differences between a limited company buy-to-let and a personally owned buy-to-let are a major plus point. A limited company buy-to-let can deduct 100% of its mortgage interest costs as an expense from its income, as it is considered a business expense. By contrast, individuals can no longer claim this tax relief.
- For higher tax payers in particular, a limited company buy-to-let can be particularly appealing as rental income held in a limited company is charged corporation tax, which is currently 25% for profits over £250,000, or 19% for profits under £50,000 (2023/2024 tax year). This is instead of income tax that would be payable on any rental income profits, which is 20% basic, 40% higher rate, and 45% additional rate.
What are the downsides?
- One of the main points to consider is that it might not save you money. If you are a basic rate taxpayer, for example, any other savings you make may be offset by the cost of setting up and running the company with an accountant, as well as the potentially higher mortgage costs that can come with a limited company buy-to-let.
- If you decide to sell your rental property, there is no allowance given on the amount of capital gains tax owed, meaning you will have to pay the full amount owed on any profits made. By contrast, an individual can currently claim an allowance of £6,000 (2023/2024) of any profit made, before the CGT rate kicks in. However, this is set to be reduced to £3,000 in 2024/2025, so this may become less of a disadvantage in the future.
- As mentioned above, most lenders charge higher rates on limited company buy-to-lets, and there may also be fewer lenders to choose from as it is a more niche product. However, with the surge in limited company landlords over recent years, there has also been a rise in the number of lenders and product options available.
- While many landlords, and particularly smaller ones with fewer than three properties, carry out their accounting and tax affairs themselves, you are much more likely to need legal and/or tax assistance when setting up and running a limited company, which is an expense to factor in.
Overall, it will largely depend on personal circumstances, as well as future goals and plans, when deciding whether to operate as an individual or via a limited company structure, and conducting thorough research or taking professional guidance is always advised.
