"It is important to be wary of the potential drawbacks of using this approach to invest in your property portfolio. If you sell a property in the future, a limited company means that you will be required to pay capital gains tax on the property"
- James Mole - J3 Advisory
Letting agency, Hamptons has released data highlighting the number of limited companies set up to hold buy-to-let properties reached record highs in 2023, with 50,004 limited buy-to-let companies set up in the UK last year.
James Mole highlights what this could mean for UK property developers who are investing in buy-to-let properties, and what is driving this change in the market.
He explains: “Landlords have two options when it comes to investing in buy-to-let properties - they can either be bought as an individual or can be bought through a limited company.
“For landlords investing in a portfolio of properties, the key benefit is that buying to let through a limited company and paying corporation tax can work out more tax efficient than paying income tax as an individual.
“In terms of the surge in landlords setting up limited companies over the last year, this trend is being largely driven by economic factors and the increases to mortgage rates. As mortgage rates rose throughout 2023, so did the number of limited companies being registered by landlords, as for higher taxpayers, limited companies provide better tax relief options.
James adds: “Tax credits have also had a significant impact on the market and landlords’ approach to property investment. As of April 2020, when calculating their taxable profit, landlords can no longer deduct any of their mortgage interest from their total rental income.
“A significant benefit to landlords of setting up a limited company for property investment is that these restrictions on buy-to-let mortgage tax relief do not apply to limited companies. This means that landlords would be taxed 19% on these profits through a limited company, rather than 40-45% in income tax if they were registered as individual purchasers.
James notes: “Another key benefit is that limited companies enable property investors to grow portfolios at a faster rate because profits can be retained through the company for future investments without having to pay income tax on these funds. From a financial security perspective, investing through a limited company legally separates your investment from your finances, meaning you are not personally liable.
“However, it is important to be wary of the potential drawbacks of using this approach to invest in your property portfolio. If you sell a property in the future, a limited company means that you will be required to pay capital gains tax on the property. It is also worthwhile to be mindful of the fact that many buy-to-let mortgages carry higher interest rates and fees for limited companies than they do for individual mortgages.
James concludes: “Investing in property through a limited company will require more rigorous administrative and legal responsibilities for maintaining company and financial records. For many investors, this is where they often require professional advice and expertise from third-party professionals.”
