Everything you need to know about limited company Buy to Let

Over the last few years, there have been significant changes to the taxation and regulation of Buy to Let investments. From changes to tenancy laws to an increase in the Stamp Duty rates, landlords have been hit with a raft of changes which have seen many amateur investors exit the market.

During this period, however, there has been a sharp rise in limited company Buy to Let lending as landlords change the way they operate their rental business. So, what is a limited company Buy to Let? How does it work? What are the tax implications? And what are the pros and cons? Keep reading for the answers to these questions and more.

The background – changes to the taxation of Buy to Lets

Since April 2016, landlords have paid an extra three percentage points of Stamp Duty when they buy a Buy to Let property.

What this means is that, for a £300,000 purchase, a buyer will pay £24,000 in Stamp Duty rather than the £15,000 that would be due for a residential purchase.

More significantly for landlords, since 2016 they have faced a staged reduction on the amount of tax relief they can claim on their rental income.

Up until the 2016/17 tax year, landlords were able to deduct mortgage interest and other allowable costs from their rental income, before calculating their tax liability.

Since April 2017, the amount of tax relief that landlords have been able to claim has gradually reduced. From 6 April 2020, tax relief for finance costs will be restricted to the basic rate of income tax, currently 20%. Relief will now be given as a reduction in tax liability instead of a reduction to taxable rental income.

This means that a landlord who receives £20,000 a year in rent and pays £18,000 in mortgage interest payments will end up paying tax on the full £20,000.

The landlord will then be able to deduct £3,600 from their tax bill due to the 20% tax credit, leaving them with the final overall tax bill on their rental income. The exact amount of tax will depend on the individual’s tax bracket.

The rise in limited company Buy to Let

Recent research from Foundation Home Loans has revealed that almost two-thirds of landlords say that they were planning to buy using a limited company.

Here, a borrower sets up a limited company or property special purpose vehicle (SPV), which is purely for the purpose of owning property. The borrower then deposits funds into the limited company and arranges lending to it. This allows the company to purchase the property.

The main reason that landlords are increasingly considering this route is that the tax changes mentioned above don’t apply. If a company owns the property then it is Corporation Tax (which is paid on the profit of the business) that applies, currently at a rate of 19%. 

While tax should be favourable in the first instance, once the income (rent) is paid into the limited company, profits will ultimately need to be distributed. This is usually done via dividends, which can be more complicated.

Dividends are favourable at a low level, because the first £2,000 is tax-free but this gets higher the more you draw out:

Tax band Tax rate on dividends over your allowance
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%

In addition, when a landlord comes to sell a property, the proceeds go into the limited company and there can then be tax efficiency challenges in accessing it.

Note that anyone thinking of moving Buy to Let property into a limited company should take professional advice. There are lots of implications to this, including potential Stamp Duty and different lending criteria for new borrowing.

The pros of limited company Buy to Let

The cons of limited company Buy to Let

Get in touch

If you have any questions about limited company Buy to Let, please get in touch. Email info@depledgeswm.com or call (0161) 8080200.

Please note

The Financial Conduct Authority does not regulate Buy to let mortgages and tax advice. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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