Buying property as a limited company or personally as a landlord; which is best?

With optimism returning to the housing market in March 2024, it’s the perfect time to answer the common buy-to-let question we get asked as a contractor mortgage broker; ‘To buy investment property as a limited company or personally -- as an individual; which is best to become a landlord?’

Put another way, and as one contractor quizzed us only the other day, ‘Does it matter whether I purchase and own an investment property personally, or through a limited company?’

To both questions; I wish there was a simple answer -- but there’s not, writes John Yerou, CEO of Freelancer Financials.

Best structure as a buy-to-let property investor? There’s no-one-size-fits-all

Which method is best when it comes to purchasing a property for investment depends on:

• your personal financial circumstances;
• whether you’re a higher-rate taxpayer;
• if you’re taking out a large loan; and, crucially,
• your investment goals.

Deciding on the right set-up and structure could make a big difference in the amount of tax you’ll be paying to HMRC.

Is it still easy to invest in property and purchase your own buy-to-let?

Investing in property is a lot tougher than it used to be.

Increased regulation, interest rates, inflation, stamp duty changes and decreasing tax relief, mean that many landlords have seen a reduction in their rental revenue and profits.

To overcome these difficulties, many landlords have moved towards buying investment property through the limited company structure.

This shift has mainly come about due to changes to the mortgage tax relief rules (known as ‘Section 24’), and the different treatments in taxation.

Tax differences between personally-owned and limited company-owned properties

Let’s delve deeper into the differences between the two types of purchasing then managing buy-to-let properties.

Personally-owned property as a landlord…

Then-chancellor George Osborne’s tax diktat in 2015 means that today, some nine years later, landlords owning an investment property in their own name only receive tax relief of 20% on their mortgage interest costs. As a result, higher-rate and additional-rate taxpayers now pay more tax.

For example, a higher-rate landlord pays mortgage interest of £600 a month on a property rented out for £1,300 a month. Such a landlord now pays tax on the full £1,300, and only qualifies for 20% tax relief on the £600 interest they pay to the lender.

Limited company-owned property as a landlord...

Limited company investment property structures bestow landlords with several benefits, namely:

• Restrictions on mortgage interest relief don’t apply to a limited company;

-- accordingly, the full cost of mortgage finance is deducted to arrive at taxable profit;

• Landlords pay corporation tax (not income tax) using a limited company buy-to-let;

-- for higher-rate taxpayer landlords, corporation tax rates are lower than income tax rates;

• Growing your property portfolio is a lot more straightforward;
• Opportunities for tax planning and saving are more plentiful.

There are advantages and disadvantages of utilising a limited company when investing in a buy-to-let property. Running your own property investment company won’t be for everyone. But, if you’re considering investing in a buy-to-let, it’s an important option to consider.

To help you determine what might be best in your situation, we have listed both sides of the argument below.

Advantages of using a limited company for landlords

Section 24 is excluded!

One of the major reasons landlords utilise a limited company structure is to circumvent the restrictions on mortgage interest relief.

Section 24 of the Finance Act 2015 prohibits the right of a landlord to deduct the majority of their finance costs (mortgage interest and arrangement fees), from their rental income before calculating their tax liability.

Therefore, landlords have to pay tax on the gross income they earn from a rental property. But, they receive a tax credit of 20% (basic rate), not the higher rate on their mortgage interest payments.

In contrast, through a limited company, landlords can deduct 100% of mortgage interest and arrangement fees as an expense. This, in turn, reduces the amount of tax they eventually pay.

Better taxation for higher-rate taxpayers

Through a limited company, property investors are liable for corporation tax on their profits (up to a headline rate of 25%).

If you’re a higher-rate taxpayer (40%/45%), the potential you can save on your tax bill is considerable. So it makes sense, financially, for higher-rate tax-payer landlords buying a new investment property to set up a limited company rather than paying tax as an individual property investor.

Yet it’s not so straightforward if (as is the case with many first-timer landlords), the rental income forms part or all of your main income. Compared to landlords who can leave their rental income in their company as profits, there will be additional personal taxes against funds drawn as salary and/or dividend.

But there are other ways to potentially save on your tax bill. If your spouse is a basic rate tax-payer, you can possibly split the dividends with them. Or you could use your limited company to pay towards your private pension. An accountant is recommended here, to help you work through the figures and assist with determining exactly how much more profitable setting up a limited company for your buy-to-let could be.

Growing your property portfolio

If you’re a higher-rate taxpayer looking to build or grow your property empire, you’ll definitely find there’s a tax saving using a limited company structure. But, there is a caveat for existing landlords. It gets a lot more complicated if you’re looking to switch existing properties that you own in your personal name, to a limited company.

Whether you’re new to property investing or have been in the game a while, there’s a lot to take on board. There are times when switching to a limited company structure might not be the right move.

For instance, if you’ve had the properties for a while, you’re likely going to face capital gains tax (CGT) and stamp duty (SDLT). But, if your rental activity is sufficient to be considered to be a “business” rather than merely “passive investment activity”, then you may qualify for incorporation relief.

What is Incorporation Relief?

Incorporation Relief is an important relief that allows the capital gain to be rolled over into the shares issued by your company.

Essentially, if all you receive for the transfer of the properties to a company is shares in that company, no capital gains tax liability arises.

Likewise, if the rental business is operated as a partnership and also registered as such with HMRC, there is a relief known as “sum of lower proportions.” This eliminates SDLT on the transfer of properties from a partnership to a limited company.

Can properties with existing mortgages be transferred to a limited company?

Matters are even more complicated when properties to be transferred are mortgaged. That’s because any existing mortgages must be transferred to the company by way of novation.

Yes, some of this advice could lead you down all manner of rabbit holes!

That’s why anyone considering transferring an existing portfolio to a company must seek advice from a qualified accountant. There are so many hidden pitfalls that it could become cripplingly costly if you get things wrong.

Better opportunities for tax planning, legacy and savings

As a company director, you have the flexibility to choose what you do with the retained profits. You can potentially:

• invest in additional properties;
• save into a tax-efficient pension; or
• pay out the profit using salary and dividends.

One major benefit of holding properties within a limited company is the options you have for inheritance tax (IHT) planning.

Landlords looking to pass their property portfolio down to children or family members could significantly mitigate inheritance tax by setting up the limited company as a “family investment company.”

What is a ‘family investment company’ for IHT purposes?

Family investments companies are structured with more than one share class. Typically, growth shares are issued to the children or to a trust in favour of the children.

Growth shares have no voting rights or entitlement to dividends, but the holder of the growth share is entitled to any growth in the value of the company.

This has the effect that any increase in the value of the property portfolio is outside of the parent’s estate, as it is attributable to the children’s growth shares. The parents retain the ordinary shares -- therefore control of the company and entitlement to income during their lifetime.

It’s also much simpler and less complicated to transfer a limited company as opposed to property owned directly.

Disadvantages of using a limited company for landlords

It’s not all a long list of benefits however! There are potential downsides of using a limited company to manage your investment portfolio.

Let’s have a look at the main ones:

Mortgage availability and interest rates

Lenders offer fewer buy-to-let mortgage products to limited companies compared with their offerings to privately-owned landlords. As a result, you may find it much more challenging to arrange a mortgage. In addition, interest rates and fees are generally higher.

Tax when you draw rental income out of the company

If you need to live off your rental income, you’ll pay yourself a salary from the company. You will pay income tax to HMRC on that salary. But, when you come to work out your pre-tax profit (corporation tax), that salary will be classed as a ‘cost.’

When you draw rental profits as dividends, you can’t class them as business expenses. You can claim a portion of dividend drawings tax-free. But, for the 2024-25 tax year, that’s a (reduced) maximum of £500.  

What you’ll pay beyond that £500 depends on what your current tax band is.

Here’s what HMRC says you’ll pay on dividends above that tax-free allowance:

• Basic rate: +8.75%
• Higher rate: +33.75%
• Additional rate: +39.35%

Again, the impact will be significantly different if you don’t need to draw dividends and can leave all rental income in the business as profit.

So these HMRC surcharges will inhibit landlords with less disposable income, but will be a boon for those who can afford to leave their rental income in the limited company untouched.

Re-mortgaging to raise funds for personal reasons

A major benefit to property ownership is that you can remortgage to access any increase in the value of the property. If you own the property personally, then this is not a taxable event, irrespective of how you use the funds you’ve released with the remortgage.

If you own the property through a limited company and you choose to withdraw the released funds as salary/dividend, you will incur personal taxes. That’s because the taxman treats the withdrawal of company funds as personal income.

Benefit-In-Kind rules

If you (or anyone related to you) chose to live in a property owned by the company, you’d have to pay market rent to the company. Otherwise, you -- as the company director -- would be treated as receiving a taxable benefit-in-kind (BIK).

The benefit in kind rules don’t apply to personally-owned properties.

Annual Tax on Enveloped Properties (ATED)

ATED is an annual tax charge on residential property that has a value in excess of £500,000 and which is owned through a limited company, but not let on a commercial basis.

Again, this tax impacts situations where you (or a related party) live in a property that is owned by the company and are not paying full market rent.

Double-Taxation

There are circumstances where you could be subject to double-taxation, e.g. if a property owned by a company is sold and the proceeds are withdrawn from the company. The company will pay corporation tax on the capital gain, and then personal tax on the withdrawal of the funds.

In comparison, individuals simply pay CGT at a maximum rate of 24%.

A buy-to-let property as a company or individual, in summary…

There’s a lot of information here that’s simply not readily available online for contractors or aspiring buy-to-let investors. That may be because the people who publish similar content have a vested interest in you using their service to buy a property. Or not.

Either way, I’ve tried to keep this guide as simple as possible, while covering all the main differences between owning an investment property for rental purposes personally compared to through a limited company. If I were to expand on each of the topics I’ve covered as an accountant would, this guide could easily reach 5,000 words, compared to the 2,000 words you’ve just read!

So there really is a lot to consider. Oh and beware -- some of the elements that seem like a benefit on the surface could easily turn around and bite you on the backside at the end of the tax year! To be forewarned, is hopefully to be…

Final checks before you plump for 'LTD' over personally-owned or vice versa

Anyway, if you feel brave, have a go at crunching the numbers yourself. But, having bounced much of this guide off an accountant, I’d always recommend running the numbers through a qualified tax adviser, before deciding which way to go.

What I can offer you with certainty is the mortgage advice you need once a qualified accountant has pointed you in the right direction. Take your time. Weigh up all the advantages and disadvantages before deciding if a limited company is right for both you and your investment goals.

Only when you’re sure of the outcomes would I recommend taking the plunge. Good luck!