London based Landlord and Property Expert

Fact File

Buy Personally Or Through A Limited Company?

I am often asked whether it is better to buy property in a limited company or personally.  Whilst I am neither an accountant nor a financial adviser and you must seek professional advice, I am happy to recount some of my experiences and how I understand the situation.  For my examples below, note the current threshold for paying the higher tax rate is £50,000.

Section 24 tax changes mean that landlords are taxed on their turnover, not on their profits. If you buy a residential property personally, you will not be able to set all of your expenses against your income for tax purposes.  The main issue is finance costs like mortgage interest.  From 5 April 2020, you will only be able to claim tax relief at the basic rate, currently 20%.   There are special transitional arrangements in place until then.  The restrictions do not apply to commercial property.

Here is an example.  Imagine you have a PAYE job and you earn £50,000 per annum.  You also earn £10,000 in rental income from a residential property and the mortgage costs are £4,000, which means you have made £6,000 profit.  The way this is calculated for tax purposes is that you have income of £60,000, so you will pay 40% tax on the £10,000 rental income which is £4,000.  You can claim 20% of the £4,000 that you paid in mortgage costs which is £800 as a tax credit, so your tax bill on your rental earnings would be £3,200.

Under the old system, your income would have been calculated as £60,000 minus the £4,000 mortgage costs and you would have paid 40% on the £6,000 profits that you made.  So your tax bill on your rental earnings would have been £2,400.  So you can see that the tax liability has risen substantially.

One of the advantages of buying a property personally is that you can apply for very competitively priced buy to let mortgages, provided you have a good credit record.  As I write, the cheapest buy to let mortgage is a 65% loan to value 2 year tracker deal with a £1,995 fee at 1.44% offered by The Mortgageworks.

Another advantage of buying a property personally is that if you ever wanted to move into it, you would not be subject to ATED which is a tax that is levied on people who live in properties worth more than £50,000 that they own through a limited company.  This won’t be an issue as long as you never plan to live in the property.  The current levy on properties up to £1million is £3,650 per annum and it gets much higher the more the property is worth.  Be aware that if you decided to move into a rental property and you have a buy to let mortgage, you must either repay the mortgage or change it to a residential loan.

When you operate a limited company, you need to file an annual tax return and have a separate set of accounts for the company – these are accountancy costs which are in addition to filing a personal tax return.

The main advantage of buying in a limited company is that all of the finance costs can be set against your profits for tax purposes.  So in the example I gave earlier where rental income is £10,000, mortgage costs are £4,000 and profits are £6,000, the company would pay corporation tax at 19% on the £6,000.  That is £1,140, considerably less that the £3,200 if owned personally.  But if you wanted to take the £6,000 out of the company as a dividend, the tax on the first £2,000 is 0% then it would be 32.5% because you earn over £50,000 and are a higher rate tax payer. So that is £1,950 in dividend tax.  Add that to the corporation tax and the total is £3,090.  So you would feel like not taking any money out of the company and indeed many people in this situation choose to leave funds in the company and save them up as a deposit to buy another property.  The dividend tax rate if you earn less than £50,000 and are a basic rate taxpayer is 7.5%.

If you buy a property in a limited company, you will need a limited company mortgage.  The cheapest limited company mortgage at the Mortgageworks is 2.84% with a £1,995 fee for a 2 year fix.  That is available up to 75% loan to value and the stress testing on limited company mortgages tends to be at 125% rather than 145% which means you can often borrow more than through a personal mortgage.  That means that rent has to cover 125% of the mortgage payment (often at a theoretical rate of 5.5%) rather than 145%.

A quick comparison will show how much more you might pay for a limited company mortgage.  A loan of £200,000 at 2.84% is £473.33 per month, whilst at 1.44% it would be £240 per month – saving £2,800 a year.

To work out if it is more cost effective to buy in a limited company than personally, you really have to do all of the sums regarding mortgage, tax considerations and the costs of running a company, including your time dealing with the company paperwork.

One advantage of buying properties within a limited company is that it is easier to transfer ownership to others – for example family members.  Rather than selling properties to them and incurring stamp duty and capital gains tax liabilities, you can simply transfer your shares in the company to them. If that is an issue for you, then buying in a company may be beneficial.

Lots of landlords have been considering whether it is worth transferring their properties from personal ownership to company ownership to reduce their tax liability.  First you should consider all of the factors I have described above.  Secondly you will have to sell your properties to the company and that will incur stamp duty and capital gains tax liabilities.  Most lenders will not allow you to transfer ownership to a company so you may need to remortgage, which can also be costly.

Some companies offer a scheme that uses an LLP model to restructure beneficial ownership and tax liability – the best known are Less Tax 4 Landlords and Property 118.  There will be a cost for all of the legal work involved and there may be ongoing costs for accountancy and broker services.  Most of these providers are confident that their schemes are acceptable to HMRC.  Remember tax laws can change and future court cases could have an impact.  You might spend a lot of money setting something up to find that you no longer need it because a future Chancellor of the Exchequer has changed the rules – this is something that nobody can predict.  In spite of the set up and ongoing costs, some landlords with larger portfolios say they see the LLP schemes as beneficial.

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