Introduction
The decision between personal and company ownership of buy-to-let properties is a crucial one for buy-to-let, landlords and property investors. This comprehensive guide will delve into the tax implications, advantages, and disadvantages of each approach, providing you with the essential information to make an informed decision.
The Basics of Buy-to-Let
Buy-to-let refers to the purchase of a residential property with the intention of renting it out to tenants, and is a form of property investment. As a landlord, you can generate income through rental payments, as well as potentially benefit from capital growth if the property’s value increases over time.
The two primary ownership structures for buy-to-let properties are personal ownership and ownership through a limited company – which pros and cons to each.
Tax Implications for Personal Ownership
As a personal owner of a buy-to-let property, your rental income is treated as part of your overall taxable income. This means you are subject to income tax at your marginal rate, which varies depending on your total income.
Some key points to consider are:
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- Income tax: Rental income is taxed at your marginal rate (20%, 40%, or 45%, depending on your total income). All property income is taxed at your personal tax rate as unlike in a Limited Company, it is assumed you have drawn down all of the rental income.
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- Capital gains tax: When selling the property, you are liable for capital gains tax on any profit made, currently at a rate of 18% for basic rate taxpayers and 28% for higher rate taxpayers. You can use your annual capital gains tax allowance (recently fallen to £6,000 for 2023/24 tax year) to offset the gain.
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- Mortgage interest tax relief: Personal landlords are no longer able to deduct 100% of their mortgage interest costs from their rental income before calculating their tax liability. Instead, you receive a tax credit equal to 20% of your mortgage interest payments. This is a significant disadvantage for higher and additional tax payers.
Tax Advantages of Owning Through a Limited Company
Operating a buy-to-let property through a limited company has several potential tax advantages:
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- Corporation tax: Rental income is subject to corporation tax, currently at a rate of 19%, which is generally lower than income tax rates for higher earners. Note – if your buy-to-let company profits exceeds £50,000 you will be subject to a corporation tax rate of 25%+. If you wish to reinvest these profits this tax treatment is usually much more favourable than holding property personally.
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- Dividends: Profits can be distributed as dividends, which are taxed at a lower rate than income tax (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers).
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- Mortgage interest: Limited companies can fully deduct mortgage interest from rental income before calculating their tax liability, unlike personal landlords.
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- Capital gains tax: Companies are not subject to capital gains tax. Instead, any gains on the sale of a property are taxed at the corporation tax rate which is usually works out lower than capital gains. However – you will be taxed again if you wish to withdraw these funds from your Limited company – so Limited companies are often seen as a best long term choice or for estate planning.
Disadvantages of Limited Company Ownership
Despite the tax advantages, limited company ownership also comes with its share of drawbacks:
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- Higher mortgage rates: Limited companies often face higher mortgage rates than personal landlords, as there are fewer lenders in the market for corporate buy-to-let mortgages.
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- Additional administrative costs: Running a limited company incurs ongoing administrative costs, such as annual accounts preparation, corporation tax returns, and Companies House filings. You will likely benefit from the services of a buy-to-let accountant.
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- Reduced flexibility: Withdrawing money from a limited company can be less flexible than personal ownership, as funds must be distributed as dividends or salary, both of which have tax implications.
Making the Right Decision
Choosing between personal and company ownership depends on your individual circumstances and financial goals.
Here are some factors to consider:
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- Your tax bracket: Higher rate and additional rate taxpayers may find limited company ownership more tax-efficient due to lower corporation tax rates and the ability to fully deduct mortgage interest costs.
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- Portfolio size: If you plan to build a large property portfolio, limited company ownership can offer greater tax planning opportunities and asset protection, in addition to the tax benefits.
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- Long-term plans: If you intend to reinvest rental profits into purchasing additional properties, a limited company may be more tax-efficient, as profits are taxed at the lower corporation tax rate.
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- Access to finance: Ensure you can secure a suitable mortgage for your chosen ownership structure, as the availability and rates of corporate buy-to-let mortgages may differ from personal mortgages. This may be influenced by your Loan-to-Value percentage.
Conclusion
Ultimately, the decision between personal and company ownership for buy-to-let properties depends on your unique situation and investment goals.
Consider the tax implications, advantages, and disadvantages of each approach, and seek professional advice from us if you would like to work the numbers for your specific situation.
