Taxes are no joke. If you work as an individual landlord, you must be paying income tax. However, if you buy properties as a limited company, you become liable to pay capital gains tax and corporation tax.

For the last few years, the government has been making a few changes and now, individual landlords cannot deduct mortgage from their income, and thus, their tax bill doesn’t get reduced.

This is a significant reason why it has become more practical to set up a limited company, as it comes with various tax benefits. If you wish to buy and to let properties, we’d recommend you consider setting up a limited company. Continue reading this blog to understand the benefits and drawbacks of making property purchases by setting up a limited company. Seeking tax advice from a qualified professional is crucial to understand and leverage these deductions effectively.

When setting up a property rental business, opting for a limited company structure can offer benefits such as limited liability protection and potential tax efficiency. Consider consulting with a legal or financial advisor to determine if a limited company is the best structure for your specific situation.

Can You Buy Properties by Setting Up a Limited Company?

Yes, absolutely. Rather, it is beneficial to set up a limited company for buying to let properties. The best part is that you’ll get various benefits for making property purchases as a limited company.

Additionally, using a separate bank account to manage the income and expenses of the limited company can help with better financial tracking and tax purposes.

Benefits & Drawbacks of Making a Property Purchase by Setting Up a Limited Company

While you should always consult a tax professional to discuss your business and analyse what’s right for you, it is important to note that the income generated from rental properties will be considered taxable income and should be managed accordingly. Here is a list of benefits and drawbacks of setting up a limited company to buy properties:

Benefits

Corporation Tax vs Income Tax

When it comes to landlords who work as individuals, their rental incomes, such as Airbnb income, are taxed under income tax. Moreover, their other incomes, such as interest and another salary, are also taxed.

If you’re working as a private landlord on a large scale, you’ll have to pay huge amounts of tax savings top of income tax.

On the other hand, if you set up a limited company for buying properties, you’ll have to pay corporation tax on the profits you earn.

Currently, the corporation tax rate is at 19%. Moreover, landlords usually pay themselves a small salary from their company and show high dividends as tax rates implied on dividends are way less than income tax.

Mortgage Deductions

The government made changes in the tax rules, and private landlords are no longer allowed to deduct mortgage expenses or mortgage interest from their income. Thus, there’s no way for them to reduce rental income from their taxes.

However, buying properties through a company system will allow you to treat your mortgage interest as your company business expense. Thus, it reduces the corporation’s tax liability. Additionally, property taxes are also considered deductible expenses when managed through a limited company.

Tax Benefits on Inheritance

As a limited company owner, you’ll have the liberty of avoiding paying huge amounts of inheritance tax when you pass down your business or personal name to any of your family members.

This is because the beneficiaries will be able to pay income tax and to get BPR on your assets.

Moreover, you get the upper hand over a private landlord as you can access various methods, trust structures, and shares via a limited company.

Drawbacks

Following are the drawbacks of the property investors buying properties via a limited company:

CGT – Capital Gains Tax

You are liable to pay a Capital Gains Tax or CGT whenever you transfer property to your limited company. The CGT is taxed at the property’s market value and potential capital gains tax is still applied if you give the property to the company as a gift.

The rate taxpayers CGT you’ll pay will depend on the amount of income tax you’re liable to pay. As a normal taxpayer, you’ll be charged 18% CGT, and as a high rate taxpayer, you’ll be charged 28% CGT. Understanding capital allowances is crucial for managing the tax implications of rental properties.

SDLT – Stamp Duty Land Tax

Stamp Duty Land Tax or SDLT is charged on properties when they’re transferred to a limited company if their value exceeds a particular amount. Here, the SLDT is also calculated on the basis of the property’s market value. Moreover, you’ll also be charged a 3% SDLT if that property is not classed as a main residence.

Mortgage & Legal Charges

When transferring your properties to a limited company, legal paperwork will be required, and you may have to pay various mortgage charges as well. Thus, you will have to consider paying these charges while setting up a limited company.

We recommend you register the limited company first and then start buying properties. This will eliminate the complexities of transferring properties.

Consider all the Ongoing Costs

When you start running a limited company, don’t forget to consider the ongoing costs, such as the cost of hiring an accountant or other employees to manage the work.

Council tax is another ongoing expense that needs to be considered when managing rental properties through a limited company.

Can You Live in Your Limited Company’s Property?

The answer to the question is yes. You can live in a property owned by your company, but you may be liable to pay taxes. Moreover, you may have to face the consequences if the property you’re planning to live in has been purchased by the limited companies using the limited company’s buy-to-let mortgage.

Should You Start Your Property Business via a Limited Company?

Whether you should start as a private landlord or via a limited company depends on whether you’re planning to deal in multiple properties or only 1-2 properties.

If your plan is to purchase multiple properties, you should start by setting up a limited company.

However, if you want to buy and rent out 1 to 2 properties only, you’ll be better off working as a private landlord. It would be best if you also took advice from your accountant regarding the same. Regardless of the business structure, you will need to pay tax on the income generated from the rental properties.

The Bottom Line

To conclude, you’ll gain various benefits by setting up a limited company if your plan is to purchase and own investment property or to let multiple properties.

However, it would help if you went through our guide to understand various aspects of setting up a limited company and the tax implications for the same.

We hope the blog has helped you understand all the vital aspects of setting up a limited company and helps you make a wise decision.

Why us for property limited company accountancy?

Before setting up a limited company for property rental, it is essential to conduct thorough research on the legal and financial implications involved. Understanding the responsibilities and liabilities associated with running a property rental business as a landlord is crucial for making informed decisions. Additionally, understanding the tax purposes of various expenses is crucial for managing a rental property business.

When setting up a limited company for property rental, it is advisable to seek professional advice from accountants, solicitors, or business advisors. They can provide guidance on the most suitable legal structure for the company, tax implications, and compliance with regulations related to property rental businesses.

In order to set up a limited company for property rental successfully, it is important to register the company with the appropriate authorities, including HM Revenue & Customs (HMRC) and Companies House. Additionally, creating a robust business plan outlining the company’s objectives, strategies for property acquisition and management, and financial projections is key to establishing a solid foundation for the business.

We have 18+ years of experience in UK property tax and accountancy. We have helped thousands of landlords setting up limited companies for property rental business. To discuss further call us on 03300 887 912

Frequently Asked Questions – FAQs

What are the pros of setting up a limited company for rental income property?

Setting up a limited company can provide liability protection, as the company’s finances are separate from your personal finances. It may offer tax advantages, such as lower corporate tax rates and the ability to offset mortgage interest against rental income.

What are the cons of setting up a limited company for rental property?

There are additional administrative and legal responsibilities associated with running a limited company. Mortgages for limited companies can be more difficult to obtain and may have higher interest rates.

How does tax liability protection work for a limited company?

Liability protection means that the company’s debts and obligations are generally the responsibility of the company itself, rather than the individual owners or shareholders.

What tax advantages are available when setting up a limited company for rental property?

Limited companies are subject to corporation tax, which may be lower than personal income tax rates. Mortgage interest can be offset against rental income, reducing the overall tax liability.

Can I transfer existing rental properties into a limited company?

Yes, it is possible to transfer existing rental properties into a limited company, but this may have tax and legal implications that should be carefully considered.

What are the initial steps to setting up a limited company for rental property?

Consult with a legal or financial advisor to understand the implications and requirements of setting up a limited company. Register the company with the appropriate government authority and ensure compliance with all legal and tax obligations.