Is a limited company buy-to-let right for you?

The proportion of buy-to-let companies is growing in the UK. A record number of landlords chose to incorporate during 2024, with Companies House data showing 85,000 new properties purchased by limited companies in England and Wales – that’s 165% more than during the same period in 2017! But, what does it mean to buy property through a limited company and why might it be beneficial? Read on for answers…

What’s meant by ‘limited company buy-to-let’?

A limited company buy-to-let is just that – it’s a rental that is purchased and owned through a UK limited company, with the company (not the individual) the legal owner of the property.

The landlord effectively becomes a director and shareholder after incorporating. Any rental income earned is paid to the company, with the landlord withdrawing money via a salary, dividends or director’s loan repayments. Outgoings such as mortgage payments, tax and expenses are also dealt with through the company.

Why are limited company buy-to-lets so popular?

As you may have guessed, the popularity of limited company buy-to-lets is mainly to do with tax efficiency. The way landlords claim buy-to-let mortgage interest changed in 2020, we’ll let Simply Business explain how this led to more landlords setting up limited companies than ever before:

“Since 2020, landlords have no longer been able to claim buy-to-let mortgage interest as an expense on their income tax bill. Instead it has been replaced with a 20 per cent tax credit. This has meant increased tax bills for many landlords, particularly those that pay tax at a higher rate. As a result, landlords have transferred ownership of their properties to limited companies to pay corporation tax at between 19 per cent and 25 per cent instead of income tax.”

Are there any other advantages to incorporating as a landlord?

Yes! Alongside full mortgage interest tax relief and lower tax rates on profits, managing an expanding buy-to-let property portfolio through a limited company can be simpler, especially if your aim is to grow. Retained profits can after all be reused without personal tax charges making scalability more of a certainty for those seeking finance or support from long-term investment.

Clearer separation of personal and business finances makes the process of tracking costs, profits and performance more straightforward too.

What about the drawbacks of limited company purchases?

It is important to note that limited company buy-to-lets are better suited to some landlords than others. There are several factors to consider, with the drawbacks often overlooked initially. Limited company mortgages tend to have greater mortgage interest rates, larger arrangement fees and higher deposit requirements (most lenders require at least 25% deposit).

For all the simplicity incorporating affords landlords later down the line, the process of setting up and maintaining a limited company can be complex. It also incurs ongoing costs, with company formation, annual accounts, corporation tax returns and accountant fees taking a big slice out of more modest profits. When the time comes to sell, you’ll be greeted by corporation tax on gains too.

Is setting up a limited company right for me?

For higher rate taxpayers looking to build a property portfolio for the long term, buying through a limited company can make perfect sense. Less so for basic-rate taxpayers with modest profits and just one property under their belt.

Seeking guidance from an independent mortgage advisor can help make sense of the pros, cons and considerations of limited company buy-to-lets. Discover a solution that suits your circumstances by contacting our local advisors today.