Is purchasing a buy-to-let through a limited company suitable for you? In this guide we will outline the differences between owning a rental property through a limited company and as a private landlord. We will discuss the pros and cons of limited companies and provide guidance on how to set one up. 

What is a limited company buy-to-let? 

A Special Purpose Vehicle (SPV) mortgage, also referred to as a limited company buy-to-let mortgage, allows a company to take out a mortgage to acquire a rental property.  This approach offers tax advantages as rental earnings and profits are subject to corporation tax instead of personal income tax.  However, there are various other advantages and disadvantages to consider when opting for this type of mortgage.

How are limited company buy-to-let’s more tax efficient?

Limited company buy-to-lets can be more tax-efficient than owning a rental property as a private landlord for several reasons:

  • Corporation Tax: Limited companies are taxed on their profits at the corporation tax rate, which is currently lower than the income tax rate for higher earners.
  • Mortgage Interest Relief: Unlike private landlords, limited companies can still deduct mortgage interest as a business expense when calculating profits, which can reduce the amount of tax paid on rental income.
  • Expenses: you can deduct certain expenses from your rental income, which can make it more tax-efficient than owning the property as a private landlord. Some of the deductible expenses include mortgage interest, property management fees, repairs and maintenance costs, insurance premiums, and utility bills. 

Additionally, if you have a home office that you use for managing your rental business, you may be able to deduct a portion of your home office expenses as well. By deducting these expenses from your rental income, you reduce the amount of taxable income you have, which can result in a lower tax bill.

In contrast, when you own a buy-to-let property as a private landlord, you can only deduct mortgage interest and other expenses from your rental income up to certain limits.

  • Capital Gains Tax: If you sell a rental property as a private landlord, you will be subject to capital gains tax on any profit made. However, if the property is owned by a limited company, it will be subject to corporation tax on any profit made from the sale.
  • Inheritance Tax: If you plan to pass on your rental property to your heirs, owning it through a limited company can make it easier to pass it on without incurring inheritance tax.

What are the advantages of buying a buy-to-let property through a limited company?

In addition to the ability to reinvest profits and expand your portfolio, buying a buy-to-let property through a limited company also offers other advantages. 

Limited Liability 

One such advantage is limited liability protection, which means that the shareholders’ personal assets are protected in the event of financial difficulties or bankruptcy of the company.

Improved rental coverage stress tests  

It is generally the case that stress tests on limited company buy-to-let mortgages can be less harsh than those applied to regular buy-to-let mortgages. This is for because limited companies are not subject to the same restrictions on mortgage interest tax relief that individuals face, which can make it easier to borrow more on a limited company buy-to-let property.

  • Tax planning: owning a rental property through a limited company can provide more flexibility in terms of tax planning, as the company can deduct certain expenses from its taxable income, potentially resulting in lower tax bills.
  • Ownership: having a limited company structure can make it easier to transfer ownership of the property, which may be beneficial in situations where you want to pass the property down to family members or sell it to another investor.

What are the disadvantages of buying a buy-to-Let property through a limited company?

There are also some disadvantages to buying a buy-to-let property through a limited company:

  • Higher initial costs: Setting up a limited company can be more expensive than buying a property as an individual, as there may be legal and accounting fees involved.
  • Limited borrowing options: Limited companies are seen as riskier by lenders, which can limit the number of mortgages available to them. Interest rates on buy-to-let mortgages for limited companies may also be higher.
  • Complex tax rules: While there can be tax advantages to buying a buy-to-let property through a limited company, the tax rules can be complex and may require the help of an accountant.
  • Reduced flexibility: Owning a property through a limited company can be less flexible, as it may be more difficult to transfer ownership or sell the property.

Capital Gains Tax 

There are some differences in how CGT is calculated and paid for limited companies compared to individual landlords.

One of the main differences is that limited companies are not entitled to a personal CGT allowance, which is currently £12,300 for individuals. This means that all gains made on the sale of a buy-to-let property owned by a limited company are subject to CGT at the prevailing rate. 

Additionally, companies are not able to benefit from the lower rates of CGT that apply to the sale of assets held for longer periods of time by individuals.

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How do I set up a property company for buy-to-let purchases?

Incorporating an SPV is a relatively straightforward process that can be completed quickly and easily by registering a limited company through the Companies House website. 

This can typically be accomplished within 30 minutes, and the cost is as low as £12. However, it’s important to understand that there are ongoing responsibilities that come with owning a company that must be taken seriously.

How to manage your limited company or SPV:

Managing an SPV involves several key tasks, such as:

  • Maintaining accurate financial records: As with any business, it is crucial to keep accurate financial records for an SPV. This includes tracking income and expenses, preparing financial statements, and keeping records of all transactions.
  • Filing annual returns: SPVs must file annual returns with Companies House, which includes information about the company’s directors and shareholders.
  • Complying with legal requirements: As a limited company, an SPV must comply with various legal requirements, such as having a registered office address, appointing directors and shareholders, and keeping up-to-date records.
  • Paying taxes: SPVs must pay corporation tax on any profits earned from rental income or property sales.
  • Managing the property: As the owner of a buy-to-let property, it is essential to manage the property effectively. This includes finding tenants, collecting rent, and arranging for maintenance and repairs as necessary.

It is recommended to seek professional advice from an accountant or business adviser to ensure that all legal and financial obligations are met when managing an SPV.

Transferring buy-to-let property into a limited company

Transferring a property into a limited company in the UK involves several steps and can have significant implications. Here’s an overview of the process:

  • Establish a limited company: You will need to set up a limited company to transfer the property into. This can be done online or by using a company formation agent.
  • Appoint a director: The company must have at least one director who is responsible for the day-to-day running of the business.
  • Obtain a valuation: You will need to obtain a valuation of the property to determine its market value. This will be used to calculate the stamp duty liability on the transfer.
  • Transfer ownership: The property can be transferred into the company by either selling it or gifting it to the company. If the property is sold, stamp duty land tax (SDLT) may be payable on the market value of the property. If it’s gifted, SDLT may not be payable, but there may still be capital gains tax implications.
  • Update legal documents: Once the transfer is complete, you’ll need to update legal documents such as the title deeds, mortgage deed, and insurance policies to reflect the change in ownership.

Transferring a property into a limited company may trigger a stamp duty liability. When a property is transferred from an individual to a company, the transaction is treated as if the property has been sold and bought at market value. This means that stamp duty land tax (SDLT) may be payable on the market value of the property.

How can I get a limited company mortgage?

Getting a limited company buy-to-let mortgage requires careful preparation, research, and due diligence.

 It’s important to work with a lender or mortgage broker who has experience in this area to ensure that you get the best deal and to navigate the application process smoothly.

To get a limited company buy-to-let mortgage, you can follow these steps:

  • Check your eligibility: Limited company buy-to-let mortgages are specialised products, and not all borrowers or properties are eligible. Check with the lender or speak to a mortgage broker who specialises in limited company buy-to-let mortgages to find out if you are eligible.
  • Prepare your documentation: To apply for a limited company buy-to-let mortgage, you will need to provide documentation such as the company’s financial statements, business plan, and details of the directors and shareholders.
  • Shop around:  Limited company buy-to-let mortgages are offered by specialist lenders rather than mainstream lenders, so it’s important to shop around and compare deals from different lenders. 

You can also seek advice from a mortgage broker who specialises in limited company buy-to-let mortgages to help you find the most suitable deal.

  • Complete the application: Once you have found a suitable lender and deal, you will need to complete the application process. This will typically involve providing additional documentation and undergoing a credit check and property valuation.

Which lenders offer limited company buy-to-let mortgages? 

While a few high street banks do offer this type of mortgage, they are in the minority. 

Limited company buy-to-letmortgages are typically offered by specialist lenders rather than mainstream mortgage lenders. Limited company buy-to-let mortgages are a specialised product, and not all lenders have the expertise or resources to offer them. 

There are several reasons why most lenders do not offer limited company buy-to-let mortgages:

  • Risk: Lending to a limited company is perceived as higher risk than lending to an individual because limited companies are separate legal entities, and the lender has limited recourse if the borrower defaults.
  • Complexity: Limited company buy-to-let mortgages are more complex to underwrite and require additional due diligence, which can increase the time and cost of processing the application.
  • Market demand: Limited company buy-to-let mortgages are a relatively niche product, and there may not be enough demand from borrowers to justify the cost of offering the product.
  • Regulatory requirements: Limited company buy-to-let mortgages are subject to additional regulatory requirements compared to individual buy-to-let mortgages, which can create additional compliance burdens for lenders.

Limited company buy-to-let mortgages require a specialised approach, and not all lenders have the appetite or capability to offer them. However, there are still many lenders who specialise in this area and offer 

Is it better to set up a buy-to-let through a limited company?

Whether it is better to set up a buy-to-let property through a company or privately depends on various factors, including your personal circumstances and financial goals.

Working closely with an accountant and mortgage broker is essential when considering whether a limited company buy-to-let is the best option for you.  An accountant can help you understand the tax implications of setting up a limited company and advise you on the most tax-efficient structure for your buy-to-let investment. 

A mortgage broker can help you navigate the limited number of lenders offering limited company buy-to-let mortgages and find the best deal for your circumstances. Together, your accountant and mortgage broker can help you understand the costs, risks, and benefits of setting up a buy-to-let through a limited company and whether it is the right choice for your financial goals. 

It’s important to approach the decision with a clear understanding of your personal circumstances and long-term objectives to make an informed decision.

How can Strive Mortgages help 

Strive Mortgages has developed strong relationships with specialist mortgage lenders who provide tailored mortgage solutions to our clients. Leveraging our knowledge and expertise, we can assist you in securing the most competitive limited company buy-to-let mortgage rates currently available on the market.

We can also provide guidance on selecting the most suitable type of mortgage for your specific needs and walk you through the necessary steps to prepare for your property purchase.

For more information on mortgages for limited companies, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.