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Buy-to-Let: Reasons to Opt for Limited Companies in the UK

Buy-to-Let: Reasons to Opt for Limited Companies in the UK

So, you’re looking to diversify your portfolio and start investing in buy-to-let (BTL) real estate in the UK? Well, you couldn’t do it at a better time. The UK property market is in a huge period of growth, with investors seeing record returns. With JLL predicting that the BTL market could become the largest living sector in the UK with record values, every investor worth their salt is scrambling to lap up the best properties. However, if you’re only just getting started with your property portfolio, you may be daunted by the costs that come with investing in this asset class before you see any returns. A way to help mitigate these costs is to set up a limited company through which you can buy real estate. Here’s what this does for you and how to get it done!

What is a Limited Company?

A limited company is one where the liability of the company’s stakeholders is limited by the amount they invest. What this means is that the potential losses for each person are limited to the amount that said person has invested in the company. This protects a shareholder from having their personal assets seized if the company goes into debt because of normal business. You can set up your company to be limited by shares or by guarantee. When limited by shares, the company is owned by at least one shareholder and managed by at least one director. Likewise, a limited by guarantee company is owned by one or more guarantors and managed by a director.

The key benefit of a limited company is the total separation of the company’s assets and income from those of the shareholders or guarantors. This diminishes the risk to shareholders because, if the company goes bust, they will have only lost what they have put into the company and nothing else. Creditors or stakeholders are unable to claim the owner’s personal assets or income. This is especially beneficial if you are buying real estate through a limited company; any debts accrued as a result of the BTL cannot be transferred to you, making you that much safer from risk. It’s important to note that this does not mean you are absolved of any personal guarantees often required by a mortgage lender. All BTL Mortgage Lenders require Director’s Personal Guarantee.

Why use a limited company for buy-to-let?

Why buy-to-let landlords are setting up companies?

A key benefit of purchasing BTL properties through a limited company is the improved tax efficiency and planning that it offers. You would pay income tax on any rental income you earned as a private landlord. This can be a problem for those in higher tax brackets, who will have to pay as much as 40% in income tax. This is especially true for investors who may be brought into a  higher tax bracket as a result of their rental income. As a result of their investment, they may have to pay more income tax. This means that, in practice, their profits may stay the same or even get worse.

You can solve this problem by securing BTL through a limited company. This means that any profits made become profits of the company and are therefore not susceptible to personal income tax rates. Instead of these, you will be charged a corporate tax, which stands at 19% across the board and has no upper tiers like income tax does. This makes your investment that much more secure and brings you a higher return on your investment than if you had struck out as a private landlord. 

Furthermore, a private landlord is no longer able to deduct finance costs (like mortgage interest) from rental income. When you own real estate through a BTL, this is still the case, as you can classify it as a business expense. 

Some other key benefits of owning BTL through a limited company are:

  • Ease of setting up: A limited company can be set up online in as little as 15 minutes.
  • Future Planning is Simpler: If youhope to pass your real estate portfolio to future generations of your family, Since the properties would be owned by the separate entity of the limited company and not you, they would be protected from Stamp Duty, Inheritance Tax, and Capital Gains Tax. This means that your family would have far more to gain, plus the process of transferring ownership of a limited company is far simpler than that of privately owned property.
  • Quicker Expansion: The extra money you save by owning BTL through a limited company means that you are in a far better position to expand your portfolio quickly. This is especially important in the current market as demand for rented property has far exceeded supply, causing a great deal of scrambling to pick up the prime properties. Having the extra income to boost your maximum bid that little bit higher may be what you need to expand your investments.

This is not to say that a limited company is the best for everyone. Otherwise, everyone would be doing it. It’s important that you speak with a credited accountant before setting up a limited company to make sure that it’s the best option for you. Some of the disadvantages to consider are:

  • No Capital Gains Tax Allowance: Whereas a private landlord is entitled to up to £12,300 in CGT allowance when selling a property, since a limited company does not pay CGT, it is not entitled to this. Whether this works out better for you financially is something to discuss with an accountant before you set it up.
  • Higher Mortgage Rates: While this is not always the case, most lenders will charge higher interest rates and fees to limited companies than individual landlords. This is due to the aforementioned separation of assets. Usually, BTL mortgages are more expensive than retail, self-use mortgages.

While these are things to consider, it’s important not to let them put you off. A limited company can be an excellent way to capitalise on your real estate investment to the fullest and is certainly something to consider. Speak with your accountant and, if you decide it’s the right choice for you, get the ball rolling! There’s a whole world of investment opportunities out there; don’t let them pass you by!


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