The decision to establish a limited company for property investment depends largely on your individual circumstances, including your income level, portfolio size, and long-term investment goals.
Generally speaking, landlords with only one or two properties might find the administrative requirements of a company structure outweigh the potential benefits, while those with larger portfolios or incomes approaching higher tax thresholds might realise significant advantages.
For landlords planning substantial portfolio growth, the limited company approach may prove more beneficial in the long term, particularly regarding tax efficiency and succession planning.
With tax regulations evolving and the property market becoming increasingly competitive, numerous landlords are contemplating whether establishing a limited company might offer advantages for their buy-to-let business.
Tax Rebate Services’ guide explores the potential benefits, considerations for both new and established landlords, and practical steps involved in transitioning from individual ownership to a corporate structure for your property investments.
Understanding limited company buy-to-let arrangements
When you establish a limited company for property investment purposes, you’re essentially creating a separate legal entity that will purchase and manage your rental properties.
Unlike traditional arrangements where you personally own the property, under this structure, the company becomes the legal owner of the property asset.
Owning property in this way means all rental income flows through the company rather than directly to you as an individual.
This arrangement functions similarly to individual ownership, with the crucial distinction being that the property is acquired and owned through your limited company.
The company holds the title to the property, receives all rental income, and bears responsibility for associated expenses and mortgage repayments.
This separation between personal and business finances forms the foundation for many of the potential advantages this strategy offers.
Four key advantages for a landlord choosing a limited company
A number of the most compelling reasons landlords explore the limited company route relates to potential tax benefits, particularly for higher-income taxpayers.
- Mortgage interest tax relief: A major concern for landlords who use buy-to-let financing is the issue of tax relief on mortgage interest. This has been a significant trigger point for landlords following the phasing out of Section 24 tax relief in 2016 which has resulted in restrictions on offsetting mortgage interest as a deductible expense against rental income.
Limited companies remain unaffected by these changes, allowing full deduction of mortgage interest as a business expense before calculating taxable profit, which usually results in lower overall tax liabilities.
- Rate of tax: Limited company landlords will not pay income tax on rental profits at rates potentially reaching 45%, they will instead be subject to corporation tax, currently set at a maximum of rate of 25%. This difference can represent substantial savings for landlords in higher tax brackets.
- Splitting income: Operating through a limited company allows property owners to receive portions of their income as dividends which are taxed at a lower rate in comparison to income tax.
The first £500 of dividend income currently remains tax-free due to the dividend allowance, with subsequent amounts taxed at the lower divided rates.
- Retaining profits for reinvestment: Profits left within your limited company are not liable for personal taxation which means earnings can be kept within the organisation for reinvestment in new assets, refurbishments, or other operational costs.
This can help landlords to build up savings faster, allowing them to reinvest and grow their property portfolios.
Property asset protection benefits
Operating through a limited company creates a clear and legal separation between your personal finances and your property business.
This arrangement means the company, rather than you personally, assumes legal responsibility for business-related liabilities.
The limited liability aspect represents a significant advantage for landlords concerned about potential financial risks associated with property investment.
In theory it can give some valuable protection for your personal assets should the property business encounter financial difficulties.
While directors still have legal responsibilities, the corporate structure creates a buffer between business operations and personal finances that many property investors find reassuring.
Succession planning advantages and Inheritance tax
For landlords considering long-term family wealth preservation, limited companies can offer streamlined options for transferring ownership.
When owned within a company transferring company shares or property ownership typically presents fewer complications.
This simplified approach to succession planning can reduce inheritance tax liabilities and facilitate smoother transitions when passing property investments to family members.
The corporate structure provides a framework that potentially makes generational wealth transfer more straightforward and tax efficient compared to individually owned property portfolios.
Transferring existing personally owned properties into a company structure triggers stamp duty and potential capital gains tax liabilities, which must be carefully weighed against projected future benefits.
If you are currently an individual landlord, you might choose to acquire additional properties through a limited company while retaining ownership of your existing properties in your personal name(s).
Establishing your property investment company
For landlords setting up a limited company for property investment involves several straightforward steps, beginning with registration at companies house.
This process typically takes companies house around 24 hours to complete and costs approximately £50. When registering your company, you’ll need to:
- Select a unique trading name that isn’t currently in use.
- Provide a registered business address.
- Designate company directors and shareholders.
- Choose appropriate business categories (SIC codes).
For property investment companies, selecting the correct standard industrial classification (SIC) codes proves particularly important.
Most landlords register their businesses as special purpose vehicles (SPVs) specifically designed for property ownership and rental activities. Lenders typically require specific SIC codes, including:
- 68100: Buying and selling of own real estate.
- 68209: Other letting and operating of own or leased real estate.
- 68320: Management of real estate.
- 68201: Renting and operating of housing association real estate.
You can find a list of SIC codes for real estate in section L on companies house .GOV.
Following registration, you’ll need to establish a business bank account and register with HMRC within three months to ensure proper corporation tax compliance.
These foundational steps create the legal framework necessary for your property investment company to operate properly.
But to let mortgage considerations for limited company
Securing financing through a limited company involves similar principles to individual buy-to-let mortgages, though with some important distinctions.
Lenders will assess both the company’s financial position and the personal circumstances of directors and significant shareholders when evaluating mortgage applications.
Some lenders impose minimum personal income requirements for company directors to ensure mortgage obligations can be met during untenanted periods.
Deposit requirements typically start at 25% (higher than standard residential mortgages) reflecting the perceived additional risk associated with company structures.
While high street lenders often impose restrictions on the number of properties a limited company can finance, specialist lenders frequently accommodate larger portfolios.
Potential drawbacks for landlords to consider
Despite the potential benefits, limited company structures can have disadvantages which shouldn’t be overlooked.
For landlords contemplating a shift to an LTD structure, these are the obstacles you might encounter:
- Moving current properties: Converting properties from personal ownership to a limited company structure can result in significant capital gains tax (CGT) and stamp duty land tax (SDLT) charges, which can be considerable.
- No CGT allowance: Unlike individual property owners who receive capital gains tax allowances when selling properties, limited companies don’t qualify for these allowances.
Instead, profits from property sales through companies are subject to corporation tax, which may or may not prove advantageous depending on the rate at which you pay income tax.
- Extra admin fees: Running a limited company involves additional administrative costs, including accountancy fees for preparing company accounts and corporation tax calculations.
While these expenses are typically tax-deductible, they represent ongoing costs that must be factored into your financial planning when considering the limited company approach.
- Mortgage market limitations: While the availability of limited company buy-to-let mortgages has expanded the range of products remains somewhat narrower than those available to individual landlords.
This potentially reduced choice might impact your ability to secure the most competitive interest rates and terms, though this gap has narrowed considerably as more lenders enter the limited company buy to let mortgage market.
- No property income allowance: The property income allowance also known as the property allowance, gives landlords an exemption of up to £1,000 each tax year.
If you use the property income allowance, you can get up to £1,000 of rental income without paying income tax on it. The property allowance is only available to individual landlords and not limited companies.
Is a limited company right for your property business?
There is no universal solution for landlords when it comes to deciding on a limited company business structure.
Considering the various factors involved, it would be wise to consult with a landlord tax specialist before establishing a limited company.
We’ve covered many of the potential pros, cons and outcomes but asking for personalised guidance based on your specific financial situation and investment objectives will help you determine whether a limited company aligns with your property investment strategy.
