Buying buy-to-let property investments through a limited company

Over recent years, there has been much debate as to whether buying buy-to-let property is best as an individual or a limited company. Your personal situation and plans for the future are important factors when considering whether it’s worth investing through a limited company or not, and making the right decision could save you a significant amount of money in tax.

Benefits of investing through a limited company

Investing through a limited company has many benefits. For starters, investors pay corporation tax instead of income tax, which is significantly lower than the higher rate of income tax. Investing through a limited company also provides opportunities to minimise or eliminate inheritance tax.

Additionally, buy-to-let investors with a limited company structure can benefit from mortgage interest tax relief, unlike landlords investing as individuals. Mortgage interest tax relief has been phased out over the last few years, and as of April 2020, individual buy-to-let investors can’t deduct any of their mortgage expenses from their profits for tax purposes. In limited companies, mortgage expenses can be deducted before calculating profit.

Disadvantages of investing through a limited company

There are some disadvantages to consider when investing through a limited company. If you want to take money out of the business, the investor will end up getting taxed twice, paying corporation tax and personal tax in dividends.

Mortgages are also often at higher rates for investors purchasing through a limited company and can sometimes take longer to go through. However, rates and costs are coming down and more options are becoming available. Additionally, accountancy costs are more expensive as investing through a limited company creates more work for accountants.

Is investing in a limited company right for me?

It depends on your investment strategy and what your goals are to decide if investing in a limited company is right for you. Firstly, consider if you want or need an income now or are you happy to not touch that until a later time. If you want to receive an income now from your portfolio, investing through a limited company isn’t efficient from a tax perspective. However, if you’re building up a pot for the future, it’s worth considering investing as a limited company.

Additionally, it’s important to think about how much income you have now and are expected to have in the future. The benefits of investing as a business really start to add up when you are a higher rate taxpayer. And if you are hoping to pass the portfolio on to your children or someone else, it’s definitely worth considering investing as a limited company.

Is now the time to invest as a limited company?

One of the main disadvantages of investing as an incorporated company is the additional amount of money required to make the switch, but now is a more affordable time for buy-to-let investors to become limited companies. Typically, investors have to pay a hefty sum of money to transfer properties into a business, but with the temporary stamp duty holiday until 31 March 2021, buy-to-let investors can make savings when incorporating their portfolio.

Investors buying second or additional properties still have to pay the 3% stamp duty surcharge, but they are not required to pay the standard rate on top of that for properties worth £500,000 or less. This also applies when incorporating a portfolio into a limited business.

Take the time to consider if investing through a limited company is right for you. And if so, consider taking advantage of the current stamp duty holiday. However, it’s always prudent  to receive professional tax advice to find out what is the best investment option for you.