Landlord Tax: Buy To Let Investments Through Limited Companies


Changes to tax laws mean that many buy-to-let investors are facing heftier tax bills than they were initially expecting, causing increasing numbers to look for effective loopholes.

Formerly, all the mortgage interest of a buy-to-let property could be deducted from the rental income for tax purposes, meaning that higher rate tax payers would pay 40% on the net amount. Recent changes in the law means that the amount of tax that is now payable will rise over the next three years until landlords are paying tax on the rental income and only receive a 20% tax credit.

Buying Through Limited Companies

One way to avoid some of the new charges is to buy an investment property through a limited company, rather than as an individual. Limited companies are not affected by the new tax changes, meaning that the mortgage interest could still be deducted from the rental income, and the remaining taxable income would be subject to corporation tax, which is not only lower than the current tax for individual landlords, but is also set to fall over the next three years.

This has become an enticing option for many investors, with new landlords setting up new companies ready for their next property purchase, or transferring existing investments into a limited company’s charge. However, it is worth remembering that there are implications for both options which need to be weighed up.

Limited Company Costs

Purchasing buy-to-let properties for sale through a limited company is a route which is growing in popularity since the changes to the tax laws were announced. However, landlords must remember to draw the money out of the company as a dividend or director’s salary, and the tax free levels for this are set to drop from next year, meaning there will be some personal costs involved which will need to be calculated.

There are other costs involved for limited companies which should be taken into account, such as accountancy charges, auditing fees and Companies House returns, which can all mount up, not to mention the quarterly reporting to HMRC for those with larger property portfolios.

Private Landlords

If you currently own a property as an individual investor, you may have decided that now is the time to switch to a limited company. Should you decide to do this, there are several implications that you need to be aware of. Any mortgages that are outstanding on a property that you wish to transfer will need the lender’s consent. Transferring your investments counts as a transaction and therefore may be subject to the capital gains tax.

As the property is now in the possession of a new owner, a new mortgage deal will need to be agreed. This deal will need to include the appropriate director’s guarantees, which means that the director of the company will be liable for the mortgage debt.

Mortgage lenders are able to check Companies House for the records and accounts of the company, so it is important to make sure that all returns are up to date. Mortgage lenders are also more likely to be cautious if the limited company is not registered in the United Kingdom, in order to ensure that the director’s guarantees can be enforced.

Buying through a limited company could be an effective way to work around the new tax changes and minimise what you will need to pay out. However, you will need to ensure that you are confident in the requirements of running a business, and that any new company will satisfy the requirements of a mortgage lender.

For more information or to browse a range of buy-to-let property investments, please contact Hopwood House.

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