Should I set up a limited company when I’m buying to let?

Jul 24, 2021 | Business

Each year, a number of residential landlords in the UK are setting up limited companies to purchase buy-to-let properties. 

That means they aren’t doing business in their own name, but through an organisation which is completely separate from themselves financially and legally.

But what’s in it for them? What are some of the benefits and drawbacks in doing this? And should you set up a limited company when buying residential property to let?

Tax benefits 

The main attraction of buying to let through a limited company concerns some of the tax benefits.

Residential landlords who don’t have a limited company will pay income tax on their profits at their marginal rate, which, depending on how much they make, could be as high as 45%. 

Companies, on the other hand, currently pay a 19% corporation tax on their profits. Extracting your profits into income but avoiding income tax is the accountancy challenge.

Many pay themselves a basic salary within the income tax personal allowance (£12,570 in 2021/22).

They also have a dividend allowance, worth £2,000 in 2021/22 on top of the personal allowance. Dividends can count towards the personal allowance, too, as long it’s not been used by any salary or pension income. 

Above that threshold, how much you tax pay on dividends depends on your marginal rate of income tax.

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

If you get the calculations right, it might be more tax-efficient to operate as a limited company.

You might also stand to benefit from a reduced inheritance tax liability if you make family members shareholders of the company, but you should check with a reliable accountant before you do this.

Limited liability

There are other non-tax-related benefits to buying to let through a limited company.

First, a limited company is a completely separate legal entity to its owner even if they are the sole shareholder, meaning that a company’s owner is not personally financially liable for the company if things go belly up.

Simply put, this means that should your company run into trouble, your personal assets will be secure, as debt, losses and legal claims associated with the company are the responsibility of the company itself.

A limited liability company can also boost your credibility and trustworthiness, crucial when it comes to investment and lending opportunities. 

Things to consider

However, there are things to consider when it comes to limited companies, including implications for capital gains tax.

Property investors who already hold property and want to transfer it to their limited company should bear in mind that they will have to sell the property for repurchase by their company.

If the value of the property has risen since you acquired it, a capital gains charge may apply of 28% for higher and additional-rate taxpayers.

Further, it can take a lot of time, effort and money to set up a company, although it does only take £12 to register.

There is also a bigger need for an accountant, although accountancy fees shouldn’t necessarily be viewed as a negative, given that you save more money than what you pay for expert advice.

Get in touch with us to talk about your limited company.