Should You Buy a Buy-To-Let Through a Limited Company?

With a limited company buy-to-let, the company purchases and legally owns the property. The mortgage is therefore arranged in the company’s name rather than in your personal name.

You would usually be a director and shareholder of the company, but the company is a separate legal entity.

The rental income is paid to the company, and the company is responsible for expenses, mortgage payments, accounts and tax. If you want to use the remaining money personally, you will normally need to withdraw it through an appropriate method, such as salary, dividends or repayment of money you previously lent to the company.

Each method can have different tax consequences, which should be discussed with an accountant or tax adviser.

One of the main reasons is the different tax treatment of mortgage interest. Individual residential landlords are generally restricted to a basic-rate tax reduction for qualifying finance costs. A company’s finance costs are treated differently when calculating its taxable profits, subject to the relevant corporation tax rules.

This can make company ownership attractive to some higher- or additional-rate taxpayers, particularly where the rental properties are heavily mortgaged.

A company may also allow profits to be retained within the business and used towards future property purchases. This can suit landlords intending to build a portfolio rather than immediately withdrawing all the rental profit for personal spending.

However, a company will pay corporation tax on its taxable profits, and there may be further personal tax when money is taken out. The full journey of the money—not simply the initial treatment of mortgage interest—needs to be considered.

Tax rules and individual circumstances can change, so specialist tax advice is essential before deciding.

Limited company buy-to-let mortgages can have higher interest rates and arrangement fees than comparable mortgages for properties owned personally.

The difference varies according to market conditions, the loan-to-value, rental income, property type and applicants. The number of lenders operating in the limited company market has grown, but the available options can still differ from those offered to individual landlords.

Arrangement fees are particularly important. Some products charge a fixed amount, while others charge a percentage of the mortgage. On a larger loan, a percentage fee can represent a significant cost.

A lower interest rate does not necessarily mean the mortgage is cheaper overall.

When comparing products, consider:

• The interest rate
• Product and arrangement fees
• Valuation and legal costs
• Cashback or other incentives
• Early repayment charges
• The length of the initial deal
• The total cost over the period you expect to keep the mortgage

These costs should then be considered alongside the potential tax treatment identified by your accountant.

Many limited company buy-to-let lenders prefer the property to be purchased through a special purpose vehicle, commonly known as an SPV.

An SPV is a limited company established for a specific activity—in this case, buying, letting and managing property. Its activities are recorded using Standard Industrial Classification, or SIC, codes at Companies House.

Lenders maintain their own lists of acceptable SIC codes. Common property-related codes cover activities such as buying and selling property and letting or operating property, but the exact requirements differ.

Using a straightforward property SPV can provide access to more lender options than purchasing through an existing trading company.

For example, if you already operate an accountancy, construction or consultancy business, buying a rental property through that company may restrict the lenders available. Some lenders accept trading companies, but many prefer a clean SPV that has no unrelated commercial activity.

You should check the proposed company structure, SIC codes, directors and shareholders before submitting a mortgage application or exchanging contracts.

A newly incorporated SPV can often apply for a buy-to-let mortgage without having previously traded or owned property.

Although the company may be new, the lender will assess the people behind it. This can include reviewing:

• The directors and shareholders
• Personal income
• Credit history
• Existing properties and mortgages
• Landlord experience
• Other business interests
• The proposed deposit
• The rental property itself

Some lenders accept first-time landlords or first-time buyers, while others require applicants to own a residential property or have previous letting experience.

The fact that a new company has no accounts does not necessarily prevent it from borrowing, but the directors must still satisfy the lender’s criteria.

Limited company buy-to-let lenders commonly require personal guarantees from the directors.

A personal guarantee means you agree to take personal responsibility for the company’s mortgage debt if the company cannot meet its obligations. The limited liability offered by the company does not therefore mean you can simply walk away from the mortgage.

Some lenders require every director and significant shareholder to be involved in the application. Others place limits on the number, age or location of directors and shareholders they will accept.

Complex ownership structures, corporate shareholders or multiple layers of companies may reduce the available lender options.

Independent legal advice may also be required so that each guarantor understands the obligations they are accepting. This can increase the legal costs and time needed to complete the mortgage.

Buy-to-let affordability is usually based mainly on the rent the property is expected to achieve.

The lender applies an interest coverage ratio calculation to check that the rental income provides sufficient cover for the stressed mortgage payment. The required calculation can vary according to the product, ownership structure, applicant’s tax position and whether the mortgage is fixed for a particular period.

Some lenders also apply a minimum personal income requirement or review personal affordability, even though the company will own the property.

A limited company does not therefore allow applicants to avoid credit checks, rental assessments or the lender’s normal underwriting requirements.

Purchasing through a limited company does not usually avoid the higher rates of Stamp Duty Land Tax that apply to additional residential properties in England and Northern Ireland.

Companies buying residential property will normally pay the applicable higher rates, subject to the current rules and any available reliefs. Different property transaction taxes and rules apply in Scotland and Wales.

Other taxes may also apply during ownership, when the property is sold or when profits are withdrawn from the company.

The tax position can depend on where the property is located, its value, its use and the wider circumstances of the company and shareholders.

Moving an existing buy-to-let property into a limited company is not simply an administrative change.

The company is a separate legal person, so the transfer may be treated as the company purchasing the property from you. Potential consequences can include:

• Stamp Duty Land Tax or the corresponding tax in Scotland or Wales
• Capital Gains Tax
• Legal and valuation fees
• Early repayment charges
• Repayment of the existing mortgage
• A new limited company mortgage
• Changes to tenancy and property documentation

Reliefs may be available in certain circumstances, but their application can be complex and should not be assumed.

Specialist legal and tax advice should be obtained before transferring an existing property.

A limited company may be worth exploring if you:

• Plan to build a portfolio of rental properties
• Expect to retain profits for further investment
• Pay higher or additional-rate income tax
• Do not need to withdraw all the rental profit personally
• Are investing with other people
• Want a defined business structure for your property activity
• Have received advice that company ownership suits your wider plans

Personal ownership could still be more suitable if you are buying one property, need the rental income for day-to-day spending or would face significantly higher mortgage and administration costs through a company.

These are only broad examples. Your individual calculations matter more than a general rule.

Operating a limited company creates responsibilities beyond the mortgage. These can include:

Preparing annual company accounts

• Filing a confirmation statement
• Submitting corporation tax returns
• Maintaining company records
• Paying accountancy fees
• Managing salary, dividends or directors’ loans correctly
• Keeping business and personal finances separate
• Meeting ongoing landlord and regulatory obligations

You should also consider what will happen when the property is sold, how profits will be withdrawn and how the company fits into your retirement or estate-planning objectives.

A tax saving during the early years does not necessarily mean the structure will produce the best overall result over the full investment period.

The best time to compare personal and limited company ownership is before making an offer or committing to the purchase.

A useful process is to:

1. Ask an accountant or specialist tax adviser to compare the tax implications.
2. Compare the available mortgage rates, fees and criteria under both structures.
3. Include company administration, accountancy and legal costs.
4. Consider whether you need the rental income personally.
5. Think about the number of properties you ultimately want to own.
6. Review how you may eventually sell the properties or withdraw the profits.

At Crescent Mortgages, we can explain the mortgage options available under each structure and show you how the rates, fees and lender requirements compare. Your accountant or tax adviser can then assess the tax side, allowing you to make the decision with both sets of information available.

Tax treatment depends on individual circumstances and may change in the future. Crescent Mortgages does not provide tax advice.

The Financial Conduct Authority does not regulate most buy-to-let mortgages.

Your property may be repossessed if you do not keep up repayments on your mortgage.