Differences in Limited Company or Personal Buy-to-Let

Differences in Limited Company or Personal Buy-to-Let

There are two main ways that you can operate your buy-to-let business: the first is by purchasing a property and conducting the letting as a private individual; the second is to operate your buy-to-let as a limited company. Each approach has potential advantages and disadvantages, most particularly with regard to tax liabilities, and potentially how easy it is to get a buy-to-let mortgage.

Personal buy-to-let

This is arguably the more straightforward option for buying property to let. You don’t have to set up a company, or decide how to structure your property purchases and income via a limited company structure. You also don’t have to hire an accountant, although in some cases it may be advantageous to do so (particularly if you have a portfolio of multiple properties).

You are likely to find it relatively straightforward to get a mortgage – most mainstream lenders now do buy-to-let mortgages – and in many cases the mortgage deals available to personal buy-to-let applicants can be better than those designed for limited company buy-to-lets.

One downside of this approach is that you could end up paying more tax than if you were to operate as a limited company. This is because all of your income (above your personal allowance) will be taxed at the prevailing income tax rate – 20% for basic rate, 40% for higher rate and 45% for additional rate tax brackets. Forthcoming taxation changes – which include limiting tax relief for mortgage interest to 20%, even for higher and additional rate taxpayers – could be to the detriment of some buy-to-let property owners, particularly as the equivalent corporation tax rate is due to reduce to just 17% by 2020.

Limited company buy-to-let

Setting up a limited company is surprisingly straightforward, and in most cases can be done online by either you or your accountant. Registering a new company with Companies House costs only £12, and registration is usually completed within 24 hours.

The main advantage in limited company buy-to-let lies in tax efficiency. There are basically three ways in which you can deal with profits generated by your buy-to-let business:

  • Withdraw a salary from the company structure – subject to income tax on any amount over your annual personal allowance (currently £11,000).
  • Withdraw dividends from the company structure – subject to dividend tax on any amount over your annual dividend allowance (currently £5,000).
  • Retain profits within the company structure and reinvest them, for example to refurbish existing properties or to expand your property portfolio. Company profits up to £300,000 are subject to the “small” rate of corporation tax.

By structuring your buy-to-let income stream to balance salary, dividends and retained profits, an accountant will be able to minimise your exposure to taxation and ultimately maximise the profitability of your buy-to-let business.

If you operate your buy-to-let as a limited company, you may find your mortgage options more restricted. However, as limited company buy-to-let becomes more popular, more and more lenders – especially smaller, more specialist lenders – are offering mortgages designed for this type of buy-to-let. As always, it’s important to shop around or use a mortgage broker to help find the best deal.