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Limited company buy-to-lets: are they better?

It’s becoming more and more popular for landlords in the UK to buy properties through limited companies, rather than ‘as individuals’. But is it really the better choice?

The short answer is: it depends. There’s lots of things to factor in: how many other properties you own, how you’d like to manage your rental income, how long you think you’ll own the property for... just to name a few.

A recent tax change – which means that individual landlords will soon have to pay more tax – could explain why more people are setting up companies to buy. But it’s not necessarily the best option for everyone.

Here are some of the main things to consider when you’re deciding how to purchase your buy-to-let.

Individual vs company: how do they compare?

How you’ll be taxed

If you buy your property as an individual, then your rental income will get taxed as personal income. You can claim some tax relief – but the amount you can claim is changing.

Before 2017, landlords paid less tax on their rental income, because they could subtract certain costs from that income first – like the cost of their mortgage interest.

But now, the government is phasing in some new rules. From April 2020, you have to pay tax on your rental income straight away, without deducting any costs. After that, you can only claim back the equivalent of 20% of your mortgage interest cost. Basically: you pay more tax.

Now here’s the key point when it comes to company buy-to-let: these new rules don’t affect how companies are taxed. If you’re buying a property as a company, your company pays 19% corporation tax on the rental income. Plus, companies can also claim mortgage interest as a business expense, which reduces the amount that’s taxed.

For some landlords, on the surface that might look like a much better deal. But – like with all things tax – it’s not that simple. That rental income your company collects belongs to your company. So if you want to withdraw that money (either in one go or on a regular basis) you’ll have to pay more tax to do it.

There are two main ways you can pay yourself from your company:

  1. Pay yourself in dividends. You get £2,000 worth of dividends tax free each year. After that, you’ll pay tax on those dividends (at 7.8%, 32.5%, or 38.1%, depending on your income tax rate).
  2. Pay yourself a salary, as an employee of the company. You’ll need to register your company for PAYE (pay as you earn), and pay national insurance and income tax on your salary to HMRC every month (even if you don’t pay yourself monthly). Your company will need to pay employer's national insurance on top of that – which is 13.8% of your salary each month. Because you’re now paying your regular tax and NI on top of corporation tax, this typically shakes out to be the costlier option of the two.

Selling your property

OK, so now you want to sell your property. How does owning it as a company affect how you’re taxed on the profit?

If you’ve bought as an individual, you’ll pay what’s called “capital gains tax” on any profit you earn from selling your property. Capital gains tax is either 18% or 28%, depending on your income and some other things (like how much you've been taxed before). If, like most people, you get an annual tax-free allowance – which is £12,500 from April 2019–2020 – you’ll only be taxed on profit over that amount.

Companies, on the other hand, don’t pay capital gains tax – they’re charged the regular corporation tax rate on any profit earned from selling a property. The corporation tax rate is 19% (and 17% from April 2020). If you’re a higher rate tax payer, it might look like you pay less tax than individual landlords, but – like you might have guessed by now – it’s not that simple.

As a company, you don’t get a tax-free allowance for corporation tax (though you do get something called indexation allowance). And just like with rental income, you’ll have to pay tax to withdraw the funds from your company.

That said, if you sell your property at a loss – then that’s technically your company’s loss, rather than yours personally. So you might be able to offset it against future earnings of your company (as long as you keep your company running).

What about the admin?

Setting up a buy-to-let mortgage inevitably means some paperwork, no matter how you choose to buy your property. But if you’re considering going down the company route, you’ll have a bit more on your plate.

To set up a company, you’ll have to register with Companies House and submit some paperwork (like articles of association). You’ll have to make sure you’re keeping the right accounting records – in some cases, that means paying an accountant. And you’ll have to register for corporation tax, and submit a corporation tax return every year. (Of course, if you already have a company set up, you’re ready to go!)

Then if you want to pay yourself a salary from your company, you’ll have to register for PAYE, then deduct tax and national insurance and pay that to HMRC monthly.

So in a nutshell: it depends

Like most things in life, whether you buy as an individual landlord or a company really depends – both on your circumstances, and on what you’re looking to get out of a buy-to-let.

Always talk to your accountant, financial adviser or solicitor to help you make the best choice for you. Articles like these can never give you the whole story – so don’t rely on them for advice! Taxes are a total maze and there’s a lot more to them than we’ve described here – and ultimately, it will always depend on your unique situation.

Once you’ve got professional advice and know what you’re after, we’ll help you get the right mortgage. Chat to one of our expert brokers and we’ll sort it.

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Alex Winn

Mortgage Expert | CeMAP, CeSRE

Alex decided to become a mortgage broker after he used one to buy his flat. Was he inspired by the amazing service? No. He just figured he could do a much better job. Today, Alex leads one of Habito's biggest teams of brokers, giving people the expert, savvy advice they need to make buying their homes a breeze.

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