Many people across the UK choose to invest their hard-earned money in the housing market. Buy to Let comes with multiple advantages. You can guarantee yourself a steady income besides a salary, and even increase your capital by selling the property at a higher price than what you have paid.

Due to changes in the taxation system though, more and more of those who decide to invest in a let to buy property are wondering whether they should buy in an individual name or ltd company name.

In this article, we will discuss the buy to let considerations you should make before investing your money.

Ltd Company vs. Individual Name: Understanding Taxation

Whether you’re planning to buy a property as a limited company or as an individual landlord, you undoubtedly want to make the most out of it by taking home as much revenue as possible.

Up to 2017, landlords could claim tax relief on most expenses associated with their buy to let property, including finance costs such as mortgage instalments. From 2017 on, the new taxation scheme has implemented the reduction of the amount of tax landlords can deduct from finance costs.

From 2020 on, you will only be able to claim a basic rate reduction from your income tax liability on financing costs.

With the financing costs being the main expense landlords have to face, not being able to claim tax relief on all these expenses means you’ll take home a smaller portion of your income.

Landlords and experts have come up with many creative solutions to counteract this change. Some suggested increasing the rent you charge or getting a lower mortgage rate. These, however, are not realistic solutions, at least most of the times.

An easy way to pay less tax on your buy to let income is to purchase the property in a limited company name.

Owning your rental properties in an ltd name is more profitable in terms of tax you have to pay. Limited companies pay corporation tax and not income tax. Therefore relief restrictions do not apply. You can deduct all financing costs from your turnover and only pay tax on your profit.

However, just because an ltd gets to pay fewer taxes it doesn’t mean owning your buy to let through an ltd is more profitable.

Additional Buy to Let Considerations

While buying a property in a limited company name is more tax efficient, there are other costs that determine how much you’re going to take home at the end of the day.

The mortgage will likely be your highest cost, so it makes sense to keep it as low as possible. Mortgage rates are different for personal and limited company borrowers. The former can pay less than 2% in interests, whereas limited companies often pay more than 3.4% on average.

Buy to Let Mortgages - Couple receiving keys

Another thing you should consider is the way you can access your money. As a private landlord, your income is readily available in your bank account, and you can use the amounts whenever needed. Not only you will have access to your money, but you will also be free to spend the amount as you wish. This is not the case for a limited company.

As a limited company shareholder, you can only take money out as dividends. If you’re also the director of your company, you could pay yourself a salary lower than your taxable allowance to access your money regularly while staying tax efficient. However, any profit over the threshold can only be taken out of the company as a dividend.

Depending on the amount of the dividend, you may also have to pay income tax as a shareholder of a limited company. In the 2018/2019 year, the dividend allowance was £2,000, and this figure could decrease in the future. Anything above that is taxed, and that is a further loss you’ll have to face.

If you already own a buy to let property and think of transferring it to an ltd, know that this is not possible. The only way to transfer property ownership is by a sale and repurchase transaction that incurs further costs, including capital gain tax, stamp duty, and other legal and mortgage fees.

Limited companies also have running costs that you wouldn’t incur as a private landlord. While you could run your business from home and cut off office rental, you will most likely have to pay an accountant to prepare and file your company statements and accounts.

Considering all other costs associated with a property, it would only be profitable to own a buy to let through an ltd company if you have at least four properties. With anything less than that, you’ll be able to take home more money by managing your properties as a private investor.

In Conclusion

Deciding to invest in the housing market as a private landlord or as a limited company should not be taken lightly. Which formula is the best for you depends on your personal circumstances. If you only have money to invest in one buy to let property and plan to use all generated income for personal purposes, it is more profitable to buy as a private investor.

If, on the other hand, you don’t want to use the funds to create a personal income but rather plan to reinvest profits through the company, or if you can afford to buy at least four properties, it is undoubtedly much more profitable to buy in a limited company name.

If you have further questions relating to Buy to Let Mortgages, please contact one of our advisers. Just complete the contact form on our Buy to Let Mortgage page.

DISCLAIMER: These articles are for information only and should not be construed as advice. You should always seek advice prior to taking any action.