Buy to Let Properties: Personal vs Limited Company

With savings rates plateauing at a low ebb, investing in property continues to be a more desirable, more yielding choice.  There’s a lot to consider when purchasing a Buy-to-Let property: What sort of tenants do you want to have? Will you manage the property, or will you recruit a letting agent? Will you be able to secure a buy-to-let mortgage?

Another important factor to consider is in what format you will buy the property. When you purchase a standard buy-to-let, it is normally in your own personal name much like your mortgage on your own home. The alternative is to buy through a limited company.

You can do this by setting up a small business in your own name, known as a Special Purpose Vehicle (SPV) which exists purely for purchasing and holding property. The company needs to be set up before the mortgage begins, however there is no minimum time the company will need to be trading for.

There are various things to be aware of when buying rental properties in this way, and here are the main points:

INCOME TAX vs CORPORATION TAX

Personal Buy-to-Let income is subject to income tax, just like the income you earn from employment wages. A huge benefit of Limited Company Buy to Lets is that rental income is subject to corporation tax, at the lower rate of 19% (reducing to 18% from 2020). If you’re a higher or additional rate taxpayer, you could be paying 40% or 45% on your rental income, so clearly the corporation tax rate is significantly favorable

MORTGAGE INTEREST RELIEF

Up until April 2017, private landlords who owned properties in their own names were able to deduct mortgage interest and other allowable costs associated with a let property from their rental income before they paid tax on it. Changes from this date now mean some landlords will pay more tax on their rental income. The new rules are being phased in gradually, until they are fully implemented in 2020. Each year the percentage of mortgage interest payments that can be deducted from the rental income will decrease by 25%. By 2020, you won’t be able to deduct any mortgage interest from your rental income before paying tax, meaning the entire sum of your interest payment will be subject to tax. However, these changes do not apply to buy-to-lets owned by a limited company. This is due to the fact these properties are viewed as a business and therefore all expenses can be written off for tax purposes.

INTEREST RATES

Some mortgage lenders will offer the same rates for personal landlords and limited company purchases however on the whole, rates for limited companies tend to be higher with larger fees. Not all lenders will offer limited company buy to let mortgages and there are many other factors that will differ from lender to lender, such as the maximum number of directors permitted. It’s important to always speak to a mortgage broker to establish which lender would be the best fit for your needs.

SWITCHING FROM PERSONAL TO BUSINESS

A key thing to bear in mind is if you already own buy-to-let properties in your personal name and you want to transfer them to be held in a limited company, this will trigger a sale and re-purchase. The consequences of this are you may be liable for capital gains tax and stamp duty including the 3% ‘second home’ surcharge. Other costs to consider would include legal and valuation fees.

In summary, there are pros and cons to holding buy-to-let properties in limited companies. It is extremely important to seek independent tax advice when making your decision as everyone has different tax liabilities and it should never be considered a ‘one size fits all’ rule that limited companies are more tax efficient.