Buy to Let Limited Company and Tax for Landlords

Increasing numbers of landlords are choosing to buy and manage private rented homes with a limited company. 

Landlords set up 41,700 companies in 2020 mainly to reduce their tax bills – an increase of 23% on the year before, according to research by property consultants Hamptons International. Owning and managing buy-to-let property in a limited company offers a different way of accounting for mortgage interest relief than if a landlord personally owns the home.

“Despite growth of the private rented sector slowing in recent years, an increasing proportion of buy-to-let purchases are now being held in limited companies,” said Aneisha Beveridge, head of research at Hamptons. 

“We estimate that around half of all rental properties bought today are being put into a company, up from close to one-in-five during 2016. “While most of this growth has been driven by larger landlords, smaller landlords, particularly those who are higher rate taxpayers, have also reaped the tax saving benefits from incorporating.”

Property companies hit a record number

The research also revealed landlords set up more companies between 2016 and 2020 than in the previous 50 years, corresponding with the phasing in of changes to the taxation of mortgage interest relief by April 2020. By the end of last year, Companies House had 228,743 buy-to-let companies registered, with one-in-three based in London and almost half (47%) in London and the South-East.

“As the company buy-to-let market has matured, more mortgage lenders have entered the space,” said Beveridge. 

“Back in 2016 there were just a handful of lenders who offered company buy-to-let mortgages, often at a greater premium than today. “But with more high street names entering the limited company space in recent years, competition has driven down interest rates to within a percentage point of similar products designed for landlords purchasing in their own name. 

“December marked the first time since the onset of the pandemic that prospective tenant numbers surpassed 2019 levels. 

“At the same time, the number of rental homes on the market fell by double-digit percentages in every English region outside London. This has driven rental growth up significantly over the last three months to a point where rents are rising faster than house price growth in almost every region.”

Tax benefits of incorporating for landlords

The tax benefits of a buy-to-let company against owning rental property revolve around how mortgage interest is treated in the accounts. 

A company can offset 100% of mortgage interest while an individual is limited to 20%.

 The table shows the different amounts of tax due on a £250,000 rental home with a £187,500 (75% loan-to-value) mortgage that generates £1,000 rent a year. The calculations assume an interest-only mortgage of 2.5% for individuals and 3.5% for the company.

Source: Hamptons International

How mortgage interest relief works

Since April 2017, the tax treatment of mortgage interest relief has changed for landlords, escalating income tax on rental profits each year. The changes were phased in over four years until April 2020. 

The result has taken away a significant tax advantage of investing in property. From April 6, 2020, landlords can no longer claim mortgage interest as a business expense to reduce their tax bills. Instead, they can offset a tax credit based on 20% of the mortgage interest they pay each year. 

Little has changed for basic rate taxpayers – paying income tax at a rate of 20% - but landlords at the top end of the lower rate banding could move into the higher rate tax bracket. Higher rate taxpayers (40%) have seen the mortgage interest they can offset cut by half, pushing up their tax bills.

Incorporation as a limited company is not only about tax

The bad news is moving a property business into a limited company is not a universal solution that helps landlords pay less tax. It is fitting that incorporating will let landlords paying higher rate tax offset the total amount of mortgage interest they pay as a business expense each year. But this is only part of the picture. 

Moving property to a company is expensive. Landlords will rack up capital gains tax and stamp duty bills, pay higher mortgage rates and spend more on accounts and other administration. These bills could easily wipe out years of rental profits. 

Besides offsetting more interest to reduce taxable profits, corporate landlords are likely to pay less tax on income drawn from a company, too. Another option is leaving a property portfolio in personal ownership but forming a company for new purchases. Any landlord thinking about jumping from individual to corporate buy to let should crunch the numbers with a tax professional first. Avoid off-the-peg solutions offered by so-called experts. 

There are no ‘secret’ formulas, and these solutions often collapse under HM Revenue & Customs scrutiny.

Property companies and CGT

Capital gains tax is also affected by incorporation because companies do not pay CGT. Instead, CGT is wrapped up in corporation tax and paid at a lower rate than individuals. 

A buy-to-let mortgage broker Property Master study revealed that 40% of landlords were unaware of current CGT reporting rules. 

For individuals, current rules demand any CGT on selling a home must be reported and paid within 30 days of completion. Companies declare and pay tax on gains annually. Companies pay tax on gains at 19%, while individuals pay at 18% or 28% on residential gains depending on if they are a basic or higher rate taxpayer.