Investing in property is one of the most reliable ways to build long-term wealth, generate passive income, and contribute to housing needs. Among the various property investment strategies, starting a buy-to-let business offers one of the best ways to maximise returns. In this article, we’ll explain why establishing a buy-to-let limited company is an advantageous investment strategy and how it can help you secure long-term success.
What Is a Buy-to-Let Limited Company?
A buy-to-let limited company is a legal entity specifically set up for the purpose of purchasing and managing rental properties. Unlike individual investors, who directly own their properties, a limited company owns the assets, which can offer more favourable tax benefits.
This structure allows landlords to pay corporation tax instead of income tax, potentially resulting in tax savings. The company can pay you a salary or dividends from the rental income, giving you flexibility in how you draw money.
Why Start a Buy-to-Let Limited Company?
Establishing a buy-to-let limited company can be an excellent option for property investors, but it’s essential to understand the factors involved in deciding whether this strategy aligns with your goals. Here are some key benefits of a buy-to-let company:
1. Tax Benefits
- Lower Corporation Tax Rates: You’ll pay corporation tax on your rental profits, which can be lower than personal income tax rates.
- More Favourable Mortgage Tax Relief: Unlike individual landlords, limited companies are not subject to restrictions on mortgage interest tax relief.
- Capital Gains and Inheritance Tax Savings: Transferring properties between companies may allow you to avoid paying inheritance tax or capital gains tax depending on your circumstances.
2. Limited Liability Protection
- Your investment properties are legally separate from your personal affairs. This means you are not personally liable for any losses, protecting your personal assets.
Considerations Before Setting Up a Buy-to-Let Limited Company
While there are significant benefits, there are also important factors to consider when investing through a limited company. Here’s what you should keep in mind:
1. Higher Mortgage Rates
- Limited companies often face slightly higher mortgage interest rates and additional fees compared to individual buy-to-let investors.
2. No Capital Gains Tax Allowance
- Limited companies are not eligible for personal capital gains tax (CGT) allowances, which may be a key factor for property flippers. Individual investors benefit from an annual CGT allowance, but limited companies do not.
3. Additional Administrative Requirements
- Operating a limited company involves more paperwork, including annual accounts, tax returns, and company filings. This can require additional time and resources.
Steps to Set Up a Buy-to-Let Limited Company
Setting up a buy-to-let limited company is straightforward. Here’s a quick guide to the process:
1. Register Your Company
- It costs £12 to register online with Companies House. Your company can be registered within 24 hours.
- You’ll need to choose a unique company name, provide a registered address, and appoint directors and shareholders.
2. Set Up a Business Bank Account
- A separate business bank account is essential for keeping personal and business finances distinct.
3. Register for Corporation Tax
- If you’re registering online, you can also register for corporation tax at the same time. If not, you must do so within three months of starting to trade.
Understanding Tax Implications for Buy-to-Let Limited Companies
Taxation differs for private landlords and buy-to-let limited companies. Here’s an overview:
Private Landlord Tax Rates
- Personal Allowance: No tax on earnings up to £12,750.
- Basic Rate (20%): Applied on income between £12,571 and £50,270.
- Higher Rate (40%): Applied on income between £50,271 and £150,000.
- Additional Rate (45%): Applied on income over £150,000.
Limited Company Tax Rates
- Limited companies pay a flat 25% corporation tax for companies with profits of over £250,000.
- Companies with profits under £50,000 will still pay 19%. Businesses with profits between £50,000 and £250,000 will pay a rate between 19% and 25%, depending on their marginal relief. Marginal relief ensures that companies with profits in this range don’t suddenly face the full 25% tax rate.
Setting Goals for Your Buy-to-Let Limited Company
Before starting a buy-to-let limited company, it’s essential to define your investment goals. Consider the following:
1. Company Purpose
- The company must be established with the intention of buying, selling, or managing property.
2. Company History
- The company doesn’t need to be in business for a certain amount of time, but lenders may prefer established companies with a solid track record.
3. Personal Guarantees
- Lenders may require personal guarantees from directors to reduce risk. These guarantees often extend to major shareholders.
4. SPV vs. Trading Company
- A Special Purpose Vehicle (SPV) is a simpler structure used solely for property investment, making it easier for lenders to assess risk. Lenders typically favor SPVs over trading companies, which are involved in multiple business sectors.
How to Set Up a Buy-to-Let Mortgage for Your Limited Company
Getting a buy-to-let mortgage for a limited company is similar to applying for one as an individual landlord. However, many lenders require borrowers to use a mortgage broker.
Key Steps:
- Meet Lender Criteria: Ensure you meet the lender’s specific criteria for limited company mortgages.
- Consider Mortgage Broker Services: Many lenders require intermediaries, making a broker essential for finding the best deal.
- Consult with a Tax Adviser: Working with a tax adviser or accountant will ensure your setup is structured correctly for both tax efficiency and ease of securing a mortgage.
Is Starting a Buy-to-Let Limited Company Right for You?
Starting a buy-to-let limited company can be a powerful way to build wealth through property investment, offering tax advantages and limited liability protection. However, it’s important to carefully consider the associated costs, such as higher mortgage rates and administrative responsibilities, before making a decision.
Consulting with financial professionals, such as accountants and mortgage brokers, will help ensure that you’re making the most informed choice for your property investment journey.
If you are exploring options on how to get started in property investment, make sure to listen to The Wealth Blueprint’s episode ‘How to Get Started In Property Investment’ to hear more about how a buy-to-let limited company can benefit you.
Key Takeaways:
- Tax Efficiency: Lower corporation tax rates and mortgage relief.
- Protection: Limited liability shields your personal assets.
- Considerations: Higher mortgage rates and no CGT allowance.
With the right strategy, a limited company can provide long-term benefits and passive income. If you would like to seek further advice and tailored consultation from Advantage Investment, please feel free to contact us.
