You might be a landlord with multiple buy-to-let properties already earning some rental income. Or, you might just want to buy residential property or a second home for personal or business use.

Either way, you can choose if you wanted to buy through a limited company. Here’s our guide to how that works, and some important things to consider.

Pros of buying a property through a limited company

There are some tempting benefits to purchasing a property through a limited company.

1. Tax benefits of buying through a limited company

You may already suspect (or know) that buying through a limited company can have positive implications for tax on your buy-to-let earnings, especially if you’re an existing homeowner or residential landlord. You might be surprised by the specifics though.

If you’re a private landlord, your rental income profits will be taxed as income, with a top rate of 45%. What does this mean, exactly? Well, for most people in England, Northern Ireland, and Wales, income tax works like this:

  • Everyone has a personal allowance. In 2021/22, this is £12,570. You don’t have to pay income tax on your personal allowance, but you will pay some national insurance (NI). Then:
  • Earnings from £12,570 to £50,270 are taxed at 20%.
  • Earnings from £50,270 to £150,000 are taxed at 40%. 
  • Any earnings over £150,000 are taxed at 45%, which is also known as the additional rate or “top rate”. There are some minor differences in Scotland, and personal circumstances may also affect your income tax rate. 

If you own your properties through a limited company, you’ll have to pay Corporation Tax on your profits instead. Corporation Tax is only 19% (at the time of writing). Even without doing the maths, you can see there are huge savings to be made here.

As the owner of a limited company, you only pay tax on profits withdrawn from that company. Anything that isn’t liquid (in other words, hasn’t been taken from the company accounts/shares and isn’t sitting as money in an account) isn’t taxed. 

2. Tax planning

Owning property through a limited company lets you take advantage of things like maximising tax-free benefits or operating LLPs (limited liability partnerships), which limit the liability of each business partner to the amount they invested in the business.  Both of these decrease your tax burden.

You can also pass a limited-company-owned property on to family members without inheritance tax. You just need to make sure those family members are shareholders in the business. 

3. Mortgage relief 

Since changes to UK tax law in 2017, private landlords can no longer deduct the interest charges on their mortgage from their rental income. But for limited companies, mortgage interest counts as a business expense. This means you can still deduct the cost from profits before you pay corporation tax. That’s another big advantage.

4. Controlling risk

If you buy a property through a limited company, in most cases, you’re exposing yourself to far less personal risk than you would by buying as an individual. 

Basically, financial liability is limited only to what the company owns and the risks the company took on. Not what you own personally. So if something goes wrong, your personal finances are not on the line. If you’re worried about protecting other assets, this can be a good thing. 

Potential problems of buying property through a limited company

Of course, if there were no negatives to buying property through a limited company, everyone would do it every time. Here are a few potential stumbling blocks:

1. Hassle and administration

This one may sound a little vague, but as the owner of a limited company, you’ll be required to file annual accounts. This means you’ll need the help of a tax accountant. 

Of course, the more properties you own through your company, the more additional admin you’ll be required to do. It’s worth weighing up the cost and benefits if you only plan to own one or two properties. 

2. Moving between a limited company and personal ownership isn’t easy

You can’t simply hand a property over from your name to your company’s, and you can’t go the other way easily either. Instead, you have to either transfer or sell the property to its new owner (whether this is you as an individual or your limited company). 

Most people simply sell the property at market value as this involves less admin than transferring a deed. It does, however, still come with costs, like stamp duty, Capital Gains Tax, and legal fees. 

3. Taxes on money withdrawn from the company

To access your profits, you need to pay yourself a salary through your company. Your salary is taxable income and counts as a cost (or an expense) in terms of your pre-tax profits for your company. 

The maths can be a little confusing here, so if you’re considering this, it might be a good idea to talk to your financial advisor or your accountant. There are plenty of ways to make sure you’re tax-efficient, including splitting dividend payments with a spouse who happens to be a basic-rate taxpayer. You can judge what’s best for you.

How to buy a property through a limited company

What are the practical steps to buying a property through a limited company? That depends on your current situation. 

Buying property if you already own a limited company

Buying property through an existing limited company might be the most straightforward scenario. The only issue is finding a lender. Many buy-to-let mortgage providers won’t lend to limited companies. If they do, they may require personal guarantees from the company directors (which should be possible if you are one, but increases your personal risk). 

Beware of higher interest rates on limited company buy-to-let mortgages if you do get one, and factor them into your considerations as you weigh up the cost and benefit of buying through a limited company. All of this also applies if you’re setting up your limited company with the sole intention of buying property through it.

Setting up a limited company if you already own property

If you already own property, but you’re planning to expand your buy-to-let business, a limited company could save you money in the long run. But you’ll need to sell your existing properties to your new company. 

This involves the tax implications we’ve already mentioned, including paying capital gains tax (which will probably have increased since you first bought the property).

Myths and misconceptions about buying through a limited company

Buying property through a limited company isn’t suitable for everyone. It isn’t a magic bullet that will make you millions with no effort. Instead, it’s a fairly complicated financial decision that’s worth considering with the help of professionals.

Contrary to some rumours, buying property through a limited company: 

  • Doesn’t necessarily allow you to avoid all taxes
  • Doesn’t necessarily save you time, given the additional admin
  • Doesn’t mean you make loads of money immediately

If you’re new to being a landlord, make sure you look into the details of buy-to-let ownership – including the costs involved in being a landlord. And remember, buying through a limited company should never be a stop-gap measure. You need to be sure of your decision because it’s only over time that ownership through a limited company will bring profits. 

That being said, buying through a limited company is a sensible choice for many people, particularly landlords with more than one property – and it has become increasingly popular since changes to taxation for buy-to-let owners in 2017. 

If you need help deciding what’s best for you and your properties, you can get help with mortgages, admin, legal stuff, and more with Habito.