Buying to Let? Company or no company?

Starting a buy to let business is a popular and attractive investment for many individuals. If you are considering investing in a buy to let portfolio, it is vital that you plan carefully to maximise your return and avoid unnecessary costs and tax implications.

An office with blue, grey and white chairs, tables and stools.

One of the biggest considerations is whether a limited company should be set up as a vehicle for your investment. Many self-proclaimed “property gurus” today claim a company should always be set up before investing, but this is not the best route for many. Whilst a company has the potential to provide significant tax savings and flexibility, these advantages can often be outweighed by the additional administrative and cost burdens associated with running a limited company. 

Since everyone’s circumstances and goals are different, there is no one-size-fits-all approach. We highlight below some key points to take into consideration when weighing up options.

Profits & Tax Liabilities

  • Corporate tax rates – On profits below £50,000 a company pays tax at a rate of 19%, whilst on profits above £250,000 the rate is 25%. On profits between £50,000 and £250,000 a company pays an effective rate of tax of 26.5%.
  • Personal tax rates outside Scotland – Property rental income is taxable on an individual at 20% for basic rate taxpayers (total annual income below £50,270) and 40% for higher rate taxpayers. Additional rate taxpayers (total annual income above £125,140) pay tax at 45% on their property rental income.
  • Personal allowances – Most individuals are entitled to a personal allowance of £12,570, meaning the first £12,570 of your income in any year is tax free.  A company will pay tax on its full profit.
  • Mortgage interest – Individuals are only entitled to a tax deduction at the 20% rate for residential mortgage interest costs, regardless of whether they are a basic, higher or additional rate tax payer. Companies can obtain tax relief for 100% of their mortgage interest costs (subject to the corporate interest restriction which has a £2m threshold).

Administrative Costs & Obligations

A limited company comes with a substantial set of reporting and tax obligations which can be time-consuming and costly. These include:

  • annual company accounts;
  • annual corporation tax returns;
  • annual Confirmation Statements;
  • keeping Companies House records accurate and up-to-date.

Tax and Remuneration Planning

Investing through a limited company can provide significant tax and remuneration planning opportunities, allowing greater flexibility and control over profit extraction and tax liabilities. Some advantages are:

  • profit can be extracted as a mixture of salary and dividends to minimise the tax burden;
  • profits can be left in the company and reinvested in the business;
  • the share structure of the company can allow tax planning opportunities where there are multiple shareholders including close family members.

Property disposals

  • Individual tax rates – Individuals are subject to Capital Gains Tax (CGT) on any gain they make on the disposal of their interest in a property. The CGT rates are currently 18% (basic rate) and 24% (higher rate) for residential properties and 10% (basic rate) and 20% (higher rate) for commercial properties.
  • Corporate tax rates – Companies pay tax at the corporation tax rates (as above) on the full gain.
  • Annual exemptions – Individuals are currently entitled to an annual exempt amount of £3,000 which can be deducted from their total capital gains in a tax year.

Other Considerations

Some further considerations include:

  • Exit strategies
  • Property losses
  • Annual Tax on Enveloped Dwellings (ATED)
  • Land Transaction Tax (LTT), Stamp Duty Land Tax (SDLT) or similar
  • Inheritance Tax (IHT) planning

If you are considering investing in a buy to let portfolio and would like assistance in evaluating your options, please contact David Pescod on 01633 653194 or or your usual advisor on 01633 810081 or email to discuss how we can help.