Buy to Let through LTD company vs personal ownership: Which one should I choose?

What are the advantages of purchasing a buy-to-let through personal ownership?

1. Less admin

Managing a buy-to-let property as an individual can be less time-consuming than running a limited company. You’ll have fewer legal obligations than you would if you bought buy-to-let through a business, but you still might benefit from hiring an accountant. 

2. Capital Gains Tax (CGT) allowance

If you decide to sell your investment property in the future, you’ll benefit from Capital Gains Tax  (CGT) allowance on profits from the sale. If you bought the buy-to-let as a limited company, however, you would need to pay CGT following the sale. 

3. Lower interest rates

Individual buy-to-let investors often have access to lower interest rates and lower fees than limited companies. If you’d like help finding the very best buy-to-let mortgage for you, we can compare deals from across the market in seconds. Create a free Tembo plan to get started. 

What are the disadvantages of purchasing a buy-to-let through personal ownership?

1. No mortgage interest tax relief 

It used to be possible for landlords to deduct their mortgage interest from their rental income with the help of tax relief. By claiming the interest portion of their mortgage payments as an expense, they could reduce their tax bill and increase their profits. A basic-rate taxpayer would get 20% tax relief, a higher-rate taxpayer would get 40% tax relief and an additional-rate taxpayer would get 45% tax relief. 

This was particularly effective for landlords with interest-only mortgages, as they could effectively deduct their whole mortgage payment from their rental income. 

Between 2017 and 2020, the government gradually rolled out a new system that replaced mortgage interest tax relief with a tax credit. The new tax credit is worth just 20% of the landlord’s mortgage interest payments, regardless of their tax bracket. The new system is less generous than the previous one, particularly for higher and additional rate taxpayers.

Some landlords have also been pushed into a higher tax bracket as a result of the changes, since they can no longer deduct mortgage interest expenses from their rental income. 

As a workaround, some landlords have found that they can reduce their tax liability by setting up a limited company and investing in property as a business, rather than purchasing their buy-to-lets as individuals. We’ll talk about this in more detail in the next section.

You might like our guide on How is rental income taxed?

2. Your estate may be subject to inheritance tax when you pass away

If you purchase a buy-to-let property through personal ownership, your estate may be subject to inheritance tax when you pass away. A good financial advisor can help you reduce your inheritance tax liability and ensure as much as possible is passed onto your loved ones. 

It may be beneficial to offer financial help to your loved ones while you’re alive, rather than waiting until you pass away. Take a look at our guide on the benefits of an early inheritance for more information.

What are the advantages of a buy-to-let limited company?

1. Deduct mortgage interest from rental income 

When investing in buy-to-let as a limited company, it’s possible to deduct your mortgage interest and other financial costs such as mortgage arrangement fees from your rental income before paying Corporation Tax. As an individual landlord, you’d effectively be taxed on your turnover. As a limited company, however, you’ll only be taxed on profit. 

2. Corporation Tax

If you have profits of £50,000 or less, your limited company will pay Corporation Tax at the ‘small profits rate’ of 19%. This is slightly less than the 20% you’d pay as a basic rate taxpayer and individual investor. 

If your limited company has profits of more than £250,000, you’ll pay the ‘main rate’ of Corporation Tax, which stands at 25%. 

If your limited company has profits between £50,000 and £250,000, you’ll still be taxed at the 25% ‘main rate’, but you’ll benefit from Marginal Relief. Use the government’s Marginal Relief calculation tool to work out how much relief you’ll get. 

3. Passing on wealth to loved ones

If you want to buy a series of buy-to-let properties and pass your portfolio down to other members of the family, transferring company shares can often be more straightforward and cost-effective than transferring properties as an individual. 

What are the disadvantages of buy-to-let limited companies?

1. You might pay Income Tax as well as Corporation Tax

If you want to use the money you earn from a buy-to-let investment for personal use, you may need to pay Income Tax on the money you take out of the company. This is in addition to the Corporation Tax you’ll pay on your profits. 

2. Potential funding challenges

Limited companies can find it harder to secure funding for buy-to-let than individual investors, due to a smaller choice of products on the market. 

3. Administration costs

Creating a limited company is fairly quick and easy. You can register with Companies House for just £12. Once your limited company has been created, though, you’ll have a number of legal responsibilities such as reporting and accounting. If you’d like to outsource some of these tasks to a professional, this is something you’ll need to factor into your budget. 

4. Transferring an existing property to a limited company could cost you

If you already own an investment property as an individual and you’d like to transfer it to a buy-to-let limited company, it may be subject to Stamp Duty Land Tax, legal costs and potentially Capital Gains Tax. It’s wise to get specialist tax advice before making a transfer.

Is it better to buy a buy to let property through a company or personal?

The right decision for you will depend on a number of factors such as the number of buy-to-lets you own, whether you plan to sell each property after a few years or pass them onto your loved ones, and your long-term goals. 

If property investment is your profession or you have plans to buy several investment properties, setting up as a buy-to-let limited company could be worthwhile. You’ll have more admin and legal responsibilities than you would if you were investing as an individual. But with more properties and more income, you may find it easier to outsource your accounting, admin and other responsibilities.

If you’re a newbie landlord or you’re planning to own just one or two investment properties, it can be challenging to work out whether buying a property through a company or as an individual is better. Speak to a tax specialist or financial advisor to find out which option is best for you and your situation.