Should I buy a rental property through a limited company?

Dec 5, 2023 | Blog

If you’re a landlord, setting up a limited company for rental properties can be a cost-effective way to expand your portfolio — but is it the right choice for you?

The best course of action will depend on your circumstances, including how you prefer to structure your business and which income tax band you fall into. Let’s weigh up the pros and cons.

Should I set up a limited company for rental properties?

Landlords have two main options when it comes to buying rental properties. You can:

  • purchase properties as an individual
  • purchase properties through a limited company.

Your choice will affect the tax treatment of your earnings. While self-employed landlords will pay income tax on all their rental income, buying through a limited company means you’ll pay corporation tax on the profits instead. So which is better?

Income tax vs corporation tax

Despite the recent corporation tax rise, setting up a limited company is still more tax-efficient for many landlords.

If you buy a property as an individual, you’ll need to pay income tax on your rental income alongside any other taxable earnings. With the higher and additional rates of income tax at 40% and 45% respectively, this often leaves top earners with a hefty tax bill.

Setting up a limited company, however, means you pay corporation tax instead. Depending on your company’s profits, you’ll be charged somewhere between 19% and 25%.

So if you have a large property portfolio and a high income, buying property through your limited company could save you a lot of money.

Tax on mortgage interest costs

In the past, private landlords could deduct their mortgage interest costs in full from their income to minimise their tax bill.

Unfortunately, this is no longer an option, and the Government now gives self-employed landlords a tax credit based on only 20% of their mortgage interest payments.

If you buy property through a limited company, however, you’ll be able to treat mortgage interest as a business expense. That means you can deduct the cost before paying corporation tax, boosting your tax savings even further.

What’s the catch?

While incorporating your property business can be beneficial, buying a rental property as an individual may be more straightforward.

Private landlords usually have fewer reporting obligations and less red tape to contend with compared to limited companies. There are also more buy-to-let mortgages available for individuals, often leaving companies with fewer options and higher interest rates.

Transferring ownership

If you want to transfer ownership of your existing property portfolio to your limited company, you’ll need to sell each property to the company.

This can be complicated and expensive. For example, if the market price of your property is higher than the price you originally paid, this could trigger a significant capital gains tax charge.

Furthermore, your company will usually need to pay stamp duty when buying residential properties.

For properties in Wales, land transaction tax (LTT) applies; in England and Northern Ireland, the equivalent is stamp duty land tax (SDLT), while in Scotland it’s land and buildings transaction tax (LBTT). If the company owns multiple properties, you’ll also need to pay a higher stamp duty rate.

So what’s the answer?

For most people, the best decision will depend on the answer to one question: what will save you the most money?

You’ll need to crunch the numbers to find out if the tax savings from buying property through a limited company outweigh the costs. However, this is easier said than done if you’re not a tax expert.

A specialist accountant for landlords can help you weigh up your options and identify the most cost-effective way to run your property business. The decision is yours to make — but you don’t need to make it alone.

Get in touch with us today about setting up a limited company for your rental properties.

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