If you are in BTL for the long term, is now the time to set up a Limited Company?

The time may be right for you to set up a limited company as a vehicle for your BTL properties. Everyone’s tax and financial situation is different, so seek the advice of your accountant before you embark on this route!

A limited company is legally recognised as being a separate entity from its owner, so when it comes to the limited company’s assets, it is the company that owns them. When investing in property, using a limited company can have multiple benefits.

Tax-related benefits are almost always going to be better when using a limited company rather than buying property personally, but there are many more practical reasons to take this route.

Any interest paid on a mortgage to purchase property through a limited company is fully tax deductible. So it can often work out more tax efficient to purchase an investment property through a limited company. From April 2020, landlords were no longer be able to deduct mortgage interest from their rental profits, which affects their income tax bills significantly.

A limited company pays corporation tax rather than income tax, the latter of which is currently paid at 19% of smaller companies’ profits, compared to income tax which can be up to 45% for high earners.

Obviously, you will have to pay income tax when accessing the funds from your limited company – but it is very likely that you will be better off from a tax-efficiency point of view doing this than having to pay high levels of income tax.

Sharing company profits between multiple shareholders, whether by way of salary or dividends, means that you can take advantage of using multiple individual tax allowances e.g. you and your spouse, or your children (if they are over the age of 16). You can each use as much of your income tax allowance as you want, and you can be flexible with this approach; you do not have to take the same amount of profit as each other, and you can vary the frequency of sharing out the profits, too. Bringing in new shareholders is also an option which will further increase your flexibility.

Creditors do not have access to your personal assets either, so relying on limited liability protection rather than personal liability can be useful in a recession.

Creditors only have access to the company’s assets, so if the company’s financial situation was to deteriorate, directors and shareholders will be safe from creditors. However, some lenders insist that you put a personal guarantee behind a mortgage, which can mean that creditors can access personal assets. Experienced landlords are not always asked to provide a personal guarantee.

When you own a property in your personal name, you need to pay tax on any profit you receive, even if you are intending on using the profits to reinvest in more property. With a limited company, all of your profits (after corporation tax) can be kept in the company and used to reinvest.

When a company owns a property and wants to sell up, there is an option to sell shares of the property rather than the property itself. This can be advantageous to the buyer, as they only have to pay 0.5% stamp duty on such a transaction. Stamp duty for personally owned properties can be as high as 15%.

When growing your property portfolio, you can use this to your advantage when approaching lenders for loans. By showing that you have a strong portfolio of investment properties and a well-managed limited company behind it, creditors are likely to offer good rates for loans.

The first question you should ask yourself is, am I in the BTL market for the long term? If the answer is yes, then you should seriously consider setting up a Limited Company to buy properties.

The second question you need to ask is, do I have properties in my own name now that I could transfer into a new Limited Company and/or do I plan to buy more properties going forward?

If you are a current landlord with properties in your own name, now may be an opportune time to transfer the properties from your personal name to a limited company, but it does depend on some key factors. The key factors are:

• Capital Gains Tax (GCT) will need to be paid on any profit from a sale of a property from you personally to your new limited company. You have £6,000 of free CGT per person per tax year. So, if you own a property in two names (husband and wife) this doubles up to £12,000 per annum!

• The Chancellor announced that Corporation Tax would not increase above 19% in April 2023 for companies with profits under £50,000. Thus, if you have a small SPV Limited Company which is the conduit for your future property development/lettings, this limits your tax liability!

In short, come and speak to us at Locate Property. We have multiple strategies for everyone investing in the property market. Whether its BTL, buy to sell, we have years of experience and many opportunities to help you invest in property around the UK.