We all want financial freedom and one way this can be achieved is through property. You can buy property in various ways and each has it’s own positives and negatives. Ultimately, the option you should choose is the one that’s right for you and suits your needs at that specific time.
Buying through a limited company can have various benefits. You can be taxed less, save on inheritance tax and reap more tax write offs by forming as a limited company and then purchasing your buy to let property
What to know and how to get your buy to let limited company started
When buying a buy to let property, you’ve got a few options.
- Buy it personally
- Buy it through a limited company
You’ve got many more options when buying a buy to let property through a limited company, but certain things should be considered before making the jump.
When you consider the tax benefits of running your rental income through a limited company, it makes sense to do so. But all this depends on how much rent your property will bring in. If you don’t make enough profit to make it worthwhile, setting up a limited company would not be helpful.
Before making the jump, you need to consider certain key factors:
Define what value-adding services you can offer which aren’t available elsewhere (e.g. iPhone app for letting properties). Make sure that these services cover costs cost of setting up Limited Companies. Check on whether setting up a limited company is financially beneficial for you
Cost of setting up Limited Companies:
You should expect to pay around £500-£700 in total. This includes:
o £250 – Deed Poll and Statutory Declaration (need both even if using the same solicitor) o £150 – Companies House fees o Legal Fees (Lawyer will be required to set up the Shareholders Agreement which defines how profits are split, also creates directorships). Most solicitors charge between £300-400 for this kind of work. One other thing that may need doing is changing your mortgage deed so that the company name appears on it too, but most lenders allow you to do this yourself.
Check whether setting up a limited company is financially beneficial for you:
It depends on your revenue. For example, if you bring in £20,000-£25,000 through rental income but only netting around £15,000 after all costs have been paid, it doesn’t make financial sense to run this through a limited company. But if you are bringing in £50,000-£75,000 through rental income and netting around £35,000 after all costs have been paid (this is the case with most buy to let owners), then it does make financial sense as there’s more profit left over which can be paid out as dividends.
Running your BTL property through a limited company does not mean you have to pay corporation tax. Most landlords will be paying themselves a dividend which is typically charged at 7.5%. However, suppose it’s decided that the property cannot run through a limited company, and you take all rental income personally. In that case, self-assessment rules apply, which means higher income taxes (typically 45%) could be payable.
So yes, there are more hoops to jump through when buying buy to let property through a limited company, but it depends on your circumstances as to whether it makes financial sense or not. If just starting with buy to let, then buying personal may be best for now. Still, perhaps once revenue increases enough, the benefits of running rental profit through a limited company will outweigh those of using personal.
What are the advantages of Buying buy to let property through a limited company?
There can be vast financial benefits in running your buy to let through a limited company.
It makes sense to consider how much corporation tax you would have to pay when taking profits from rental income via dividends if not using a limited company.
Dividend payments are taxed at 7.5%, whereas personal take-home pay is taxed at a minimum of 45%. This means that for every £100,000 paid in rent and taken out as a dividend, you save £67,500 by using a limited company instead of personally! That’s enough to buy yourself another property…or 20 holidays…or ten luxury sports cars etc.
The cost of setting up the limited company is around £500-700, so making these savings should be a serious consideration when weighing up the pros and cons.
What are the disadvantages of buying a buy to let property through a limited company?
There are several pitfalls involved in running your rental property business as a limited company, as well as benefits. The difference between buying as an individual or a limited company comes down to how much the business is valued once set up. Running a limited company means that you have to pay yourself dividends instead of taking income personally. This can be costly if you choose not to use a tax-efficient umbrella payment scheme.
Also, higher capital gains tax costs may be involved when selling- whether this is through shares or the sale of assets/buildings. All without exception incur capital gains tax at 28%, higher than the 18% ordinarily payable on residential property. It’s also much harder to borrow money as a limited company as most lenders require a personal guarantor for buy to let mortgages, meaning you would have to be the frontman for this kind of purchase!
Finally, if running your rental business through a limited company, more responsibilities and legal filing requirements need to be considered. For example, all limited companies must file full accounts each year with Companies House. These can take time and effort to prepare correctly – unless using an accountancy specialist.
Do I need skills or experience?
Not really. We’re not talking rocket science here, but of course, it helps if you know how to run a company, have good bookkeeping skills and are aware of the relevant tax laws.
What about buying properties abroad?
There’s no reason why running your rental property business through a limited company means that you should only invest in the UK. As long as you follow guidelines for setting up non-EU companies, investing in other countries can have huge benefits! For example, Spain is a trendy location for landlords to let with a corporate structure since it offers low taxation and a very high rental yield. Therefore, if you do decide to go ahead with this kind of investment, then make sure you research thoroughly before setting up so that all procedures are done correctly from day one – otherwise, it could be costly in the long run.
How to set up a limited company to buy a property?
You need to choose the proper limited company structure for your needs based on factors such as where you want to purchase property, how many properties you plan on buying and what kind of rental yield and return you’re aiming for.
After that, search online to find an accountancy firm in your area that can help set up a limited company – all they need from you is some basic information about your business/investment plans, and they can take care of the rest.
To summarise… With the growing demand for buy-to-let properties, it’s worth considering running this type of investment through a limited company instead of personally so that money can be made from the tax breaks and other benefits which you’re not entitled to as an individual.
On the downside, several pitfalls are involved in setting up a limited company plus legal filing requirements that need to be considered for investment purposes. Finally, running your rental business through a limited company means that you have to pay dividends instead of taking income personally, so it may cost more than buying privately unless using an umbrella payment scheme or similar.