If you are considering investing in Buy to Let properties through a Limited Company, it is important you understand the advantages, disadvantages and responsibilities associated with company ownership before making a decision. We would certainly suggest that advice is taken from a financial and legal point of view before proceeding.
There is not a straightforward answer to this question. For each case, the response could differ depending on personal circumstances, future intentions, and the availability of mortgage finance to Limited Companies for the purchase of Buy to Let properties. You should also be mindful that a Limited Company is required to file the accounts and financial status of the entire property portfolio with Companies House on an annual basis.
Higher tax relief - From 2017 to 2020 the amount of Buy to Let tax relief individual landlords can claim back will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. However, this change does not affect Limited Companies. Therefore, if you are a top rate tax payer, the tax payable via a Limited Company will be lower than tax on individual income.
No tax on dividends ≤£5,000 for individuals – from April 2016, the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance of £5,000. This means you client can potentially receive tax free dividend income from your investment properties.
No income tax when reinvesting profits to secure further properties – You could grow a BTL portfolio more quickly within a Limited Company as there will be no income tax on the retained profit, thus allowing more cash to re-invest. Although corporation tax is payable on trading profits (20%; 2015/16; reducing to 18% by 2020), this is lower than the higher income tax rate (40% for £31,786 to £150,000; 2015/16).
Personal funds can be drawn back out of the company - any advances you make to your Limited Company (e.g. the mortgage deposit), you can draw back out of the company by way of Directors Loan.
No Capital Gains Tax (CGT) allowance when the company sells a property – whereas individuals selling a property would have £11,100 CGT allowance (2015/16)
Additional cost of running a Limited Company - such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable. A client’s accountant may also charge higher fees when preparing accounts for Limited Companies.
Higher mortgage rates – Most lenders charge higher interest rates and fees for Limited Companies compared to Individual Buy to Let mortgages.
Reduced choice of lenders and mortgages – Many lenders do not offer mortgages to Limited Companies, and often if they do, the product range is much smaller.
PLEASE NOTE, Mr Mortgages do not give tax advice, it is best to speak to a professional tax adviser/accountant when considering options of how to purchase buy to let properties.
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Authorised and Regulated by the Financial Conduct Authority. Registered in England and Wales Company No. 5161473. Registered Office: Compton Holt Lodge, Compton, Paignton, Devon, TQ3 1TA. FCA Firm Number: 311509. Mr Mortgages is a trading name of Mark Rainey Mortgages Ltd.