Limited company buy-to-let: key benefits and considerations
MPowered Mortgages
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By Jennifer Harrison, Content Lead
Are you considering purchasing a buy-to-let property and wondering whether you should set up a company to do so? This article explores limited company buy-to-let mortgages and why it might be a good option for you.
Setting up a limited company to run a buy-to-let business is not unheard of, particularly for landlords with large property portfolios. However, historically, many smaller landlords have managed their buy-to-let properties in their own name. This trend began to shift in 2016 when changes to tax meant that individual landlords would no longer be able to offset their mortgage interest before tax. Recent data, from letting agency Hamptons, tells us that in 2023 the number of buy-to-let limited companies created reached a record number.
What is a limited company buy-to-let mortgage?
Simply put, a limited company buy-to-let mortgage is when you set up a limited company for the purpose of purchasing, and then renting out, a property/properties. A limited company buy-to-let mortgage is very similar to a traditional buy-to-let mortgage, with one major difference: you buy the property through the limited company, not as an individual. It is, therefore, the company that owns the property and any revenue from it will also go via the limited company.
What are the benefits to purchasing a property as a limited company as opposed to an individual?
There are several reasons you might consider purchasing property through a limited company including:
Potential tax benefits
A key reason landlords might opt to buy property via a limited company as opposed to as an individual is because of improved tax relief, particularly for those earning a high income who already find themselves in a higher tax bracket. Instead of paying income tax at a rate of up to 45%, with a limited company you’ll pay corporation tax on your profit at a rate of up to 25%.
Managing your buy-to-let through a limited company also allows you to receive some of your income in the form of dividends, ￡500 of which is tax free and the rest of which is taxed at a lower rate to the standard tax rate you’ll pay on your regular income. It’s important to note that if you’re looking for advice around tax or tax relief you should speak to an accountant and none of the information in this blog should be taken as financial advice.
No personal liability
By purchasing a buy-to-let property through a limited company you are ensuring that you won’t be held personally responsible for any losses. In other words, the running of your buy-to-let property is managed by the company and is legally separate from your personal affairs.
Reduced inheritance tax
Transferring the ownership of a property from one individual to another can be complicated. However, transferring the ownership of a company – or shares of a company – is usually much simpler and can remove certain tax liabilities such as inheritance tax. Passing your rental business to another family member is, generally, much more streamlined if done via a limited company. Again, it’s important for us to state that anyone considering a limited company buy-to-let mortgage because of tax implications should seek the advice of an accountant or finance professional before making any decisions as not all the benefits discussed in this blog will apply to every would-be landlord.
Improved professionalism
From the perspective of a tenant, communication with a company as opposed to an individual landlord can indicate that matters concerning the property will be dealt with professionally.
How do I set up a limited company for the purpose of purchasing buy-to-let property?
If you’ve decided that starting your buy-to-let business through a limited company is the best decision for you, you’ll need to register your company with Companies House. You can usually register a limited company within 24 hours and the cost to do so is ￡50. When registering your business with Companies House you will need to take the following steps:
Choose a trading name – the trading name cannot currently be in use.
Enter your registered address - this should be your place of business, for example an office space, or – with permission – you can use your accountant’s address, or your home address.
Declare company directors and shareholders – you will need at least one company director, though you can have multiple. Any shareholders should be allocated a specific percentage share of the company, with any shareholder who holds more than 25% of the company being considered a Person with Significant Control (PSC). Every PSC’s name, service address, and month and year of birth will appear on the public register.
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Select the business category – you must choose the category, also known as the SIC code, best suited to your company. When selecting the category for such a limited company, many landlords will choose to register their business as a Special Purpose Vehicle (SPV). A SPV is specifically designed for owning and renting out properties. Many lenders will only lend based on the right SIC Code being used and also require that the Limited Company is set up purely for this purpose only and be a non-trading company.
For buy-to-let lending you should use one or more of the following SIC codes:
Some lenders may allow you to purchase a property with an existing limited company if it has been set up with the above mentioned SIC codes
Following the completion of these steps, you will need to open a business bank account and register your new business with HMRC within three months so you can pay Corporation Tax when the time comes.
How do I apply for a buy-to-let mortgage through a limited company?
Not unlike applying for a buy-to-let mortgage as a private landlord, when applying as a limited company, you’ll need to ensure that the directors and shareholders of the limited company meet the lender’s criteria and affordability assessments.
Lenders will need certainty that the mortgage repayment will be covered by the rental income and, often, will require the rent to be set at 125% of the mortgage repayment. To guarantee any voids in rental income are covered, some lenders might have a minimum personal income requirement for directors/shareholders of the company. On top of this, a higher deposit is likely to be required for a limited company buy-to-let mortgage than with a standard residential mortgage, with many lenders requiring a minimum 25% deposit or even higher.
If you’re hoping to grow an extensive property portfolio with your limited company, a specialist lender might be a better choice than a high street lender. High street lenders typically cap the number of properties that a limited company can own however specialist lenders will usually accept larger property portfolios.
Are there any drawbacks to securing a mortgage through a limited company?
As with any major financial decision, there are some important things to consider before applying for a limited company buy-to-let mortgage, including the following:
No Capital Gains Tax (CGT) allowance
When you sell an asset that has gained value since you took ownership of it, you are liable to pay Capital Gains Tax on a portion of the profit that you earn. In this instance, we’re referring to property or land that is not your main residence (buy-to-let property, second home, inherited property etc). If selling as an individual, you would be given an allowance, and only pay CGT on the profit above that allowance threshold. For the 2024/25 tax year, the CGT allowance is ￡3,000.
However, buy-to-lets owned by limited companies are not entitled to CGT allowance, as limited companies do not pay CGT. Instead, when you take profit out of the business, you're subject to?Corporation Tax instead. This may work out better for you financially, but it will depend on a number of factors and is well worth discussing with a financial advisor.
Additional costs
With a limited company, there are extra costs to take into account, such as the preparation of accounts and corporation tax calculations. Although a qualified accountant should find these tasks relatively straightforward, a good accountant will come at a cost. However, if you are using an accountant, they can also help with the setup and registration of the business with Companies House.
Less choice regarding lender and product
Most lenders offering buy-to-let mortgages will offer them to non-trading limited companies. The choice of product options has expanded over recent years and now it is less likely you’ll be charged a higher interest rate for a standard limited company buy-to-let mortgage than if you were an individual buy-to-let landlord.
As always, at MPowered Mortgages we recommend seeking advice from a mortgage broker prior to making any big decisions regarding the purchase of property. They will be best placed to advise you on which products are available to you, help secure you the best deal, and, in this instance, advise on whether or not securing a buy-to-let mortgage via a limited company is the route that will benefit you most.
All information contained on this blog is for general information use only. It does not provide mortgage advice and should not be construed as being mortgage advice, which can be provided by your mortgage broker and advisor only.