What are the pros and cons of investing in property via a limited company?

Radio host Ian Collins spoke to Michael Cook, Group Managing Director at Leaders Romans Group, and Mark Frame, Senior Director at GetGround, about the growing trend of landlords setting up a limited company to purchase a buy-to-let property. Listen here on Spotify.

A recent survey from Paragon Bank suggests the number of landlords aiming to set up a limited company to purchase a buy-to-let property reached 62% in the second quarter of 2022, up from 50% in the first quarter of the year. According to Paragon, this is the highest proportion of landlords in the last three years that have indicated they are moving to a limited company.

Although some landlords have been investing in buy-to-let via a company for many years, the trend has increased rapidly since April 2017, when the Government decided to phase in changes to the rules on how mortgage interest was taxed. By April 2021, none of the interest paid on buy-to-let mortgages could be deducted from rental income; instead, investors filing self assessment tax returns would apply a relief of 20% to the cost of mortgage interest and other finance costs. This typically penalised higher-rate taxpayers who could, in the past, have claimed 40% or more tax relief. 

Meanwhile, those that invest through a limited company are still allowed to deduct finance costs from their rental profits so, on the surface, that may seem a more attractive option for landlords.

However, it’s important to be aware that this is not straightforward and there are a number of factors that can affect whether such a move would be beneficial overall to you. So, if you’re considering making new investments via a limited company, you will need expert advice.

Only once all the pros and cons are properly taken into consideration, can you assess whether investing via a limited company is the right thing for you. 

The pros of investing in buy-to-let via a limited company 

• You can deduct your mortgage interest from the rental income.
• Typically, you pay a lower tax via the company, versus rates of personal income tax.
• Selling a property or portfolio to another investor can be easily done.
• Any profit you make can be kept in the company until you need it, rather than having to be declared in the year that you personally earn the income from buy-to-let. If you’re looking for income when you retire, drawing down dividends as and when you need may be a better option for you.  
• You may be able to save money when selling a property via a limited company rather than as an individual.  
• It can improve your profit and loss balance, as limited companies have to carefully account for every expense, which you may not be doing if you are investing as an individual. 
• If you wish to pass on your portfolio to your children, making them shareholders or a company director can be much more cost-effective than inheriting the property. 

The cons of investing in buy to let via a limited company

• You can’t simply transfer a property from your own ownership to a company without incurring costs such as Stamp Duty charges (Land Transaction Tax in Wales; Land and Buildings Transaction Tax in Scotland).
• Financing via a commercial mortgage may cost more than financing a buy-to-let as an individual and you may have to pay higher fees as well. Depending on how you choose to set up and manage your limited company, you may have to pay for a business bank account. 
• You need to calculate whether the overall amount of tax you pay via a company will be less, or at least no more, than the amount you pay investing in your own name. For instance, with a limited company, you will pay corporation tax, tax on dividends and will lose your personal allowances and exemptions.  
• You will need expert advice to understand the most tax-efficient way for you to set up a limited company, how to manage your funds via a company, your ongoing accounting and filling in tax returns differently. So you may incur higher ongoing costs if you need to employ an accountant to make sure you produce accounts according to Government rules and regulations. 

It’s worth finding out if investing in buy-to-let via a limited company could be right for you. Our Smart Investment service, powered by GetGround, helps property investors set up and manage their own limited companies in a way that is safe, secure and hassle-free... In the 12 months to end August 2022, the number of incorporations GetGround facilitated per month increased 2.5x, proving it is a growing trend for landlords. Find out more information by getting in touch with your local expert.