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Why Buy-to-Let Properties in a Limited Company Could Be the Smart Move for Landlords

Why Buy-to-Let Properties in a Limited Company Could Be the Smart Move for Landlords
The property market has seen significant changes in recent years, especially for landlords and buy-to-let investors. One of the most notable shifts has been the growing trend of purchasing buy-to-let properties through limited companies. This route offers various advantages, including better tax efficiency, higher borrowing potential, and no requirement for trading history.

In this guide, we’ll explore why buying a buy-to-let in a limited company could be the best decision for landlords, break down the tax advantages, and provide case studies to illustrate the benefits and challenges.

Why Buy-to-Let in a Limited Company?

Limited companies can typically borrow more than individual landlords because lenders calculate affordability differently.

Why? As a limited company, lenders assess affordability based on rental income coverage rather than your personal income.

Interest Cover Ratios (ICRs) for limited companies are often lower, typically starting at 125%, compared to 145% or more for individual landlords.

Example:

  • Individual Landlord: Requires rental income to cover 145% of mortgage interest at a stress test rate of 5.5%.

Limited Company: Requires only 125% coverage at the same stress test rate, allowing you to borrow more.

No Trading History Required

When setting up a limited company specifically for buy-to-let purposes, known as a Special Purpose Vehicle (SPV), lenders do not require a trading history.

Why Lenders Prefer SPVs:

  • SPVs have a straightforward structure and are created solely for holding property assets.
  • SIC codes like 68100, 68209, 68320, and 82990 are typically used for SPVs, simplifying lender assessments.

Tax Advantages

One of the most compelling reasons for using a limited company is the potential tax savings.

3. Tax Advantages

One of the most compelling reasons for using a limited company is the potential tax savings.

Key Tax Benefits:

Mortgage Interest Deduction: Individuals can no longer fully deduct mortgage interest from rental income due to Section 24 tax changes. Limited companies, however, can still deduct 100% of mortgage interest as a business expense.

Lower Tax Rate: Limited companies pay Corporation Tax (currently 19% in 2024) on profits, which is significantly lower than the higher personal income tax rates (40% or 45%) for higher earners.

Retained Earnings: Profits can be retained within the company to reinvest in future property purchases, avoiding personal tax liabilities.

Dividends and Salary Flexibility: Directors can pay themselves through dividends (subject to lower dividend tax rates) or a combination of salary and dividends for optimal tax efficiency.

Inheritance Tax Planning: Limited companies can be placed into trusts, offering potential inheritance tax benefits.

Expenses: Operating through a limited company allows you to offset more costs, such as accountancy fees, travel expenses, and property maintenance.

Changes by George Osborne: The Section 24 tax changes introduced by George Osborne significantly reduced tax relief for individual landlords, making the limited company structure a more attractive option.

Impact of Section 24: Individual landlords now pay tax on gross rental income, rather than net profits after mortgage interest.

This change has driven many landlords to incorporate, as limited companies are exempt from this rule.

Lender Preferences

Lenders are increasingly favouring limited companies due to their tax efficiency and straightforward business structure.

Why Lenders Prefer Limited Companies:

  • Predictable income from rental profits.
  • Clearer financial structures and reduced personal risk for directors.

    • Case Studies

    1: Higher Borrowing Potential

  • Scenario: A landlord earning £50,000 annually wants to purchase a buy-to-let property for £300,000 with a £225,000 mortgage.
  • Individual Borrowing: The rental income of £1,200 per month doesn’t meet the 145% ICR requirement at 5.5%.
  • Limited Company: At 125% ICR, the same rental income qualifies, enabling the purchase.

    • 2: Tax Efficiency

  • Scenario: A higher-rate taxpayer earns £30,000 annually in rental profits.
  • Individual Landlord Tax: 40% tax rate applies, leaving only £18,000 after tax.
  • Limited Company Tax: 19% corporation tax applies, leaving £24,300 to reinvest or distribute.

    • 3: Long-Term Growth

    • Scenario: A landlord wants to reinvest rental profits into a portfolio.
    • Individual Landlord: Personal tax liabilities limit reinvestment potential.
    • Limited Company: Retained earnings can be reinvested tax-efficiently, enabling faster portfolio growth.

    Pros and Cons of Limited Company Buy-to-Let

    Pros

  • Tax Savings: Lower corporation tax and full mortgage interest deduction.
  • Higher Borrowing Potential: Favourable affordability calculations.
  • Flexible Profit Distribution: Use dividends or salaries.
  • Reinvestment Potential: Retain profits within the company.
  • Inheritance Planning: Options to minimise inheritance tax.

    • Cons

  • Setup Costs: Incorporation and legal fees can be a barrier.
  • Ongoing Expenses: Accountancy fees and administrative costs.
  • Higher Mortgage Rates: Limited company mortgages often have slightly higher interest rates.
  • Complexity: Requires professional advice to manage tax and compliance effectively.

    • Disclaimer

    We are authorised to provide mortgage advice only. For tax advice, please consult a qualified tax professional before making any decisions related to limited company buy-to-let investments.

    FAQs

    Q 1. Who can apply for a Catalyst bridging loan?

    Ans: No, SPVs require no trading history, making them ideal for new landlords.

    Ans: Yes, but this may incur stamp duty and capital gains tax liabilities.

    Ans: Generally, yes, but the tax savings and higher borrowing potential often outweigh the additional cost.

    Ans: Yes, retained profits within the company can be reinvested tax-efficiently.

    Ans: Yes, placing a company into a trust can offer significant inheritance tax advantages.

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