GUIDE TO
LIMITED
COMPANY
BUY-TO-LET
WHY SET UP AS A
LIMITED COMPANY?
THE GRADUAL RESTRICTION
IN THE TAX RELIEF LANDLORDS
CAN RECEIVE WILL REDUCE
OVER A FOUR YEAR PERIOD
FROM APRIL 2017.
This change means that limited company
set-ups could offer potential benefits
to many property investors. In this guide
we look at the key points you’ll need to
consider when deciding if setting up
as a limited company is right for you.
IMPROVED TAX EFFICIENCIES
AND PLANNING
Holding property in a limited
company may offer some tax
benefits to certain people. For
example, if you’re a higher rate
tax payer you could find that it is
beneficial in terms of tax saving.
When you own a property in your
name the rental profit is taxed
at your personal tax rate. Rental
profits on properties held in a
limited company are not taxed
at your personal tax rate but at
the current rate of Corporation
Tax and you’ll only be taxed on
dividends from the company if the
total of all dividends you receive
exceeds £5,000 in each tax year.
Tax on dividends is charged at the
relevant tax rate, not the same
rate as Income Tax.
If you plan to expand your property
portfolio, it is possible to retain the
profits within the company to fund
future purchases without them
being subject to Income Tax (until
you decide to draw the profits out
of the company).
As a director, you decide when to
distribute profits to shareholders.
This can help with your personal
tax planning.
THE ADVANTAGES OF
LIMITED COMPANY FOR
BUY-TO-LET PROPERTY
INVESTMENTS
SIMPLER AND QUICKER THAN
YOU THINK
Setting up a limited company takes
just 20 minutes and can be done
easily online. But we recommend
you take expert advice from an
accountant, or legal advisor before
doing so (see ‘How to set up a
limited company‘.
FUTURE PLANNING
If you plan to pass your business
on to family in the future, it is
simpler to transfer a limited
company than a privately held
property. In this circumstance, as
the property remains owned by the
company, it could also be protected
from Stamp Duty, Inheritance Tax
and Capital Gains Tax liabilities
PORTFOLIO EXPANSION
Retaining profits within the
company helps to protect them
from crystallising tax liabilities,
enabling you to expand your
property portfolio quicker.
LIMITED LIABILITY
Limited company status means
that your liability runs only to
any investment that you make in
the company (plus any personal
guarantees that your lender
requires).
THE DISADVANTAGES
OF LIMITED
COMPANY FOR BUY-
TO-LET PROPERTY
INVESTMENTS
• NO CAPITAL GAINS TAX (CGT)
ALLOWANCE
When the limited company sells
the property there is no CGT
Allowance. An individual selling
a property would be allowed
£11,100 CGT Allowance (correct
for 2016/17).
• THE ADDITIONAL COST OF
RUNNING A LIMITED COMPANY
You’ll have to factor in costs
such as the preparation of
accounts (a legal requirement),
company tax and corporation
tax calculations for HMRC,
filing at Companies House,
legal fees and annual auditing
if applicable. Accountants
may also charge a higher
fee if preparing accounts for
Companies House.
• HIGHER MORTGAGE RATES
Most lenders charge higher
interest rates and fees to
limited companies compared to
individual buy-to-let mortgages.
• A REDUCTION IN THE
CHOICE OF LENDERS AND
AVAILABILITY OF MORTGAGES
Not all buy-to-let lenders
offer mortgages to limited
companies, and those who do
tend to offer a smaller product
range.
IT’S A SIMPLE QUESTION, WITH A
NOT SO SIMPLE ANSWER:
WHAT HAPPENS IF I BUY A
BUY-TO-LET PROPERTY IN
MY OWN NAME?
Buying a buy-to-let property in
your name will leave you liable to
tax on the rental income at your top
rate which could be as high as 40%
or even 45%.
This income would be lumped on
top of your other income. You would
be able to deduct all the costs of
renting the property, including
repairs and maintenance, and
there is also the possibility of
making a deduction of 10% of the
rent which is called a ‘wear and
tear’ allowance.
On the sale of the property, you will
be liable to capital gains tax which
would either be at 18% or 28% with
the first £11,000 tax free. There
may also be the possibility of other
allowances if, for example, you
lived in the property at any time.
HOW COULD I BENEFIT FROM
OWNING A BUY-TO-LET PROPERTY
THROUGH A LIMITED COMPANY?
By owning a buy-to-let property
through a limited company, the
rental profits would be taxed at
20%. Therefore, if you were looking
to grow your property investment
portfolio, it may be more tax
efficient to hold the growing
portfolio in a limited company.
When you come to sell the property
or properties the gain will be
liable to corporation tax payabe
by the company (currently 20%)
and the profits would be left in
the company.
KEY QUESTION:
SHOULD YOU
PURCHASE A BUY-
TO-LET PROPERTY
THROUGH A LIMITED
COMPANY?
AS NOW TRANSITIONAL RATES NEW
2016/17 2017/18 2018/19 2019/20
2020
ONWARDS
RENTAL INCOME
£15,000 £15,000 £15,000 £15,000 £15,000
MORTGAGE INTEREST
£10,800 £10,800 £10,800 £10,800 £10,800
REDUCTION IN MORTGAGAE
INTEREST ALLOWANCE
0%= 0
25%=
£2,700
50%=
£5,400
75%=
£8,100
100%=
£10,800
TOTAL RENTAL INCOME ON WHICH
TAX IS PAID
£4,200 £6,900 £9,600 £12,300 £15,000
TAX AS 40%
£1,680 £2,760 £3,840 £4,920 £6,000
ALLOWABLE TAX RELIEF AT
BASIC RATE
(20% OF THE ANNUAL MORTGAGE
INTEREST)
£0 £540 £1,080 £1,620 £2,160
TOTAL TAX PAYABLE
£1,680 £2,200 £2,760 £3,300 £3,840
PROFIT
£2,520 £1,980 £1,440 £900 £360
SO WHY CONSIDER
LIMITED COMPANY
BUY-TO-LET?
If you were to purchase a buy-
to-let property in your personal
name now a higher rate taxpayer
who pays 40% tax with a rental
income of £15,000 and a mortgage
interest of £10,800 (66% of rental
income) would see their profit fall
from £2,520 in 2016/17 to £360 in
2020/21.
Below is the worked example of
how the relief will be phased in:
In the above example you would be £2,160 worse off between 2016/17 vs 2020/21. By
forming a limited company, you could help reduce your tax liabilities and potentially
be better off in the long term.
CAN I TRANSFER
THE OWNERSHIP
OF PROPERTES
I ALREADY OWN
PERSONALLY TO A
LIMITED COMPANY?
This is a question we are often
asked. If you decide to transfer
the ownership of the property
this is considered a disposal and
you would be personally liable
to Capital Gains Tax.
There is also the stamp duty to
take into account. This applies to
properties with a value of greater
than £125,000. It is often the case
that the costs involved in carrying
out this kind of transfer make the
exercise expensive and therefore
not a straightforward decision.
Therefore if you already own a
property/properties you might like
to consider retaining any existing
properties personally. If however,
you have a strategy of building
a larger portfolio of properties
over the longer term, and possibly
build as an asset to pass onto
future generations, it might be
worth doing this in a limited
company environment.
HOW TO SET UP A
LIMITED COMPANY
Setting up a limited company
is simple. You can register
your company with Companies
House online or by post. Online
registration takes just 15 minutes
and costs £12.
Here are the key things that
you’ll need when registering your
limited company.
COMPANY NAME AND ADDRESS
• You’ll need to create a unique
company name (you can
check it against the current
register online at https://beta.
companieshouse.gov.uk/)
• The address can be your
residential address
DIRECTORS AND SHAREHOLDERS
• You need to appoint a minimum
of one Director
• Additional Directors and/or a
Company Secretary can also
be added
• Each shareholder should be
allocated a percentage share
of the company
• Any shareholder with a holding
greater than 25% is a Person
with Significant Control (PSC)
• Each PSC’s name, month and
year of birth, nationality and
service address will feature
on the public register
DEFINITION OF BUSINESS ACTIVITY
• Some lenders require the
company to be defined using
the following Standard industry
Classifications (SICs}:
– 68100: Buying and selling
own real estate
– 68209: Other letting and
operating of owned or leased
real estate
– 68320: Management of real
estate on a fee or contract basis
• You should take advice on
the type of company you are
creating, including asking
your tax adviser whether
the company should be
a Special Purpose Vehicle (SPV}
ONCE YOUR COMPANY IS
REGISTERED
• You’ll need to register for
Corporation Tax within three
months
• You’ll need to set up a business
bank account
RUNNING A LIMITED
COMPANY
Many people think that limited
companies are complicated and
difficult to maintain. Whilst
there are a few additional
responsibilities, they can be easily
incorporated into your business
plan and require little effort
relative to the potential benefits.
The below outlines some of the
key activities involved in running
a limited company.
DIRECTORS’ RESPONSIBILITIES
Directors have personal
responsibility for some of the
company’s basic functions. As a
director, you can outsource these
functions to others, but you need to
make sure that you have adequate
oversight.
RECORDS AND ACCOUNTING
Accurate company and
accounting records must be
maintained. A ‘Confirmation
Statement’ (previously Annual
Return) must be submitted
each year within 14 days of
the company’s anniversary of
incorporation. Annual accounts
and tax returns will also need
to be submitted.
Active private limited companies
need to keep records for three
years. If you make changes to
the company’s name, address,
directors’ or shareholders’
structure, you will need to notify
Companies House and/or HMRC.
DRAWING FUNDS FROM THE
COMPANY
There are several options
for drawing funds from the
company including, salary,
expenses, benefits, dividends
and Directors’ loans.
The treatment of each for tax
purposes is different. A tax adviser
will be able to advise you on the
most suitable option for your
circumstances.
SEEKING ADVICE
When considering if a limited
company set up is right for you.
It is important to fully understand
the advantages, disadvantages
and your duties. We recommend
that you contact either a tax or legal
adviser prior to embarking on this
course of action.
FOR MORE INFORMATION OR TO SPEAK
WITH A MORTGAGE EXPERT
PLEASE CONTACT US:
0333 363 6080
contact@johncharcol.co.uk
charcol.co.uk
John Charcol
St Helen's
1 Undershaft
London
EC3P 3DQ
This document has been prepared for guidance only and does not constitute professional advice. YOUR PROPERTY MAY BE
REPOSSESSED IFYOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT. John Charcol is a trading
name of John Charcol Limited and its Appointed Representatives. John Charcol Limited is authorised and regulated by the
Financial Conduct Authority. The Financial Services Register number is 665649. Registered in England No. 9157892. Registered
office address for John Charcol Limited is St. Helen's, 1 Undershaft, London, EC3P 3DQ. Version 2.0 (Dec 2018)
charcol.co.uk
