Should I Register as a Ltd Company to Buy a Property?

9 min
Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

In the past, many buy-to-let properties were owned by individual investors. However, buying a rental property as a registered business has recently gained appeal. As an investor, you may want to register as a company to buy a property and want to know if there are benefits to this. 

The rise of buy-to-let companies is a significant trend in the UK property market, with their numbers skyrocketing. There are over 309,000 buy-to-let companies in the UK, a clear indication of the growing popularity of this ownership structure. 

Is there a reason why many landlords opt to buy rental properties through a limited liability company? Read on to find out. 

Ways to Own a Buy-to-let Property 

Two major ways of owning a buy-to-let property are as an individual or a limited liability company. Whichever one you choose will go a long way in determining how much tax you pay on the rental income you will generate from the property.

As an individual owner of a buy-to-let property, it’s important to be aware that you are required to pay income tax on the rental income generated. The tax rate is determined by the tax band you fall into, with basic-rate taxpayers paying 20%. This information should make you cautious about the potential tax implications of buying property as an individual.

The rate goes higher for individual investors in the higher-rate band, whose tax is calculated at 40%, while those on the additional rate band will pay at a 45% rate. 

On the other hand, if you purchase a buy-to-let as a limited liability company, you must pay corporation tax on rental income. The corporation tax rate is currently 25%, although it was previously 19%. 

The significant difference in tax rates is a compelling reason landlords are considering purchasing properties through a company structure. For individuals in the higher and additional rate bands, the income tax rate is considerably higher than the corporation tax rate, making the latter a more appealing option.

The tax changes have been one of many reasons landlords opt to buy properties through a limited liability company. Frequent changes in tax rules have also significantly affected the costs incurred in buying properties as an individual. 

Previously, taxes were calculated using whatever is left of the rental income after deducting mortgage interest. That way, landlords could significantly reduce the amount paid as income tax. This is no longer the case, as taxes are calculated using the full rental income before mortgage interest deduction. 

Although the new tax rule introduced a 20% tax credit, the amount paid as tax is still very high, especially for landlords in the higher-rate class. 

What is a Limited Liability Company?

A limited liability company is run with the business’s debts and assets separate from personal assets and debt. The changes to the mortgage tax rules have pushed many landlords toward owning a buy-to-let property through companies.  

Parents also favour this ownership structure as it benefits their children better than individual ownership. This, however, was not the case a few years ago. For some, starting a limited company and buying a house using the company structure is more efficient tax-wise.

How Do I Register an LLC to Purchase a Buy-to-let Property in the UK

Setting up a limited company is straightforward. All you need to do is register it with Companies House, a simple procedure that requires a £12 fee. 

Additionally, you must register the business with HM Revenue & Customs to fulfil your corporation tax obligations. This simple process should reassure you that setting up a limited liability company is not as daunting as it may seem. 

You are to follow this process if you switch from individual ownership of a buy-to-let property to buying a house as part of a company. It is, however, important to note that moving your individually owned property to a limited liability company is considered a sale of property. You will be eligible for stamp duty and a 3% surcharge that every second homeowner must pay under the tax law. 

But that is not all, as you may need to pay capital gains tax if the property value has increased more than £12,300. The capital gains tax threshold fell to £6,000 in 2024, making more people liable. 

You will also incur other costs while incorporating, such as legal fees. It would be best to prepare for other ongoing expenses afterwards, including costs associated with annual account filing.

What Changed About the Tax Rules?

Prior to April 2017, the tax rule allowed for the calculation of tax on rental income after deducting mortgage interest. However, this rule changed over time, limiting individual landlords to deduct only a portion of the interest. From April 2020, landlords could no longer deduct any interest as taxes are now calculated on the full rental income. 

The new tax rule, however, made provisions for a 20% tax credit on mortgage interest. Although the tax credit may seem like a relief, yet, landlords would pay more tax, especially the higher-rate taxpayers. The tax change has resulted in higher income tax for most landlords and decreased income from property portfolios. 

That is not all, as the tax change affects landlords in other ways.

  • The tax change also introduced a 3% stamp duty surcharge for individual landlords buying a second home. This tax alone can result in a higher cost for property purchases. 
  • Landlords must also get an Energy Performance Certification (EPC) for any buy-to-let property. This has also resulted in extra costs for the landlords, who will spend more to ensure their buy-to-let property complies with the standards. By April 2025, landlords of a buy-to-let property will have to get a minimum of C in the EPC rating.

Can I Reduce the Amount of Tax on a Buy-to-let by Setting up an LLC?

Many landlords choose to purchase properties through a limited company, a strategic move that can significantly reduce their tax liability. By deducting mortgage interest as part of the company’s business expenses, landlords can directly reduce their income, resulting in lower tax payments. This financial advantage is a key reason why landlords feel empowered to make this decision, knowing they are making a smart financial move.  

For individual landlords, HMRC determines the income tax rate by calculating it based on an individual’s rental income. On the other hand, setting up as an LLC means you will be subject to paying corporation tax. 

Previously, the corporation tax was set at 19%, lower than the 20% income tax paid by individual landlords in the basic-rate category. The new tax rate effective from April 2024 is 25%, lower than the 40% and 45% income tax paid by individual landlords who are top earners. 

Landlords whose earnings fall between £50,271 and £125,140 pay an income tax of 40%. Individual landlords earning above £125,140 pay a 45% income tax.

Pros of Buying Property as a Limited Liability Company

Before buying property as part of an LLC, you should consider the pros and cons to determine whether it is the right decision. 

Here are some benefits of buying a property through a limited liability company. 

#1. Bigger Loan Amount

Buying a property through an LLC may qualify you for bigger loan amounts. Many lenders are more favourably disposed towards approving larger amounts to corporations than individual landlords. 

#2. Reduction in Tax Amount

Landlords can benefit from an LLC due to the tax breaks they enjoy. A company’s mortgage interests are written off as business expenses. 

This means the landlord only pays tax on the rental income after deducting mortgage interest. Companies also pay lower rates of corporation tax than individual landlords. 

#3. Lower Rental Income Requirements

Mortgage lenders carry out affordability checks on landlords to ensure they can repay the mortgage. Individual landlords in the higher-rate band must earn 145% of their monthly mortgage repayments to pass the affordability check. 

However, as a limited liability company or an individual in the basic-rate band, the rental income you will need to earn to pass the affordability check is 125% of your monthly mortgage payment. This amount is lower, making buying a property as an LLC more attractive. 

Cons of Buying Property as an LLC

Notwithstanding the benefits of setting up an LLC, there are also downsides.

#1. Additional Costs Aside Corporation Tax

As a company, you will be liable for stamp duty as well as capital gains tax when you sell the property. You may also need to pay valuation fees and mortgage fees. This adds to the overall cost and makes switching to an LLC less attractive.

#2. Limited Number of Mortgages Available

Mortgages available to companies are limited in number when compared with that of individuals. Often, the available ones are offered at a higher rate. You may also incur additional costs in the form of arrangement fees. 

#3. More Paperwork Needed

Setting up an LLC requires a lot of paperwork. You will also be required to file annual accounts, which may result in higher accounting costs. Because companies have a higher compliance rate with tax authorities than individual landlords, you will likely pay more fees to handle your accounts. 

How Do I Know the Right Option to Choose?

Setting up a limited liability company may be ideal for some landlords, but not everyone. Considering the administration costs involved, if you are a basic-rate taxpayer or renting out only a few properties, there may be better options than the company route. 

On the other hand, if you are a higher-rate taxpayer or have several properties, you can benefit a lot more from setting up as a company than as an individual landlord. Therefore, your peculiar circumstances and long-term goals will impact your choice. 

Before deciding, evaluate your circumstances and determine if starting an LLC will earn you more in the long run. Also, consider your tax rate and long-term savings due to reduced tax bills and see if this outweighs any additional costs.

How Much Can I Save in Tax If I Buy Property Through a Company?

The amount you can save in tax if you buy a property through a company depends on the tax category. 

Here is an illustration:

Mark’s annual income is £70,000, and he pays tax at a 40% rate. Let’s say Mark decides to buy a property for rental purposes worth £450,000, and the expected annual rental income is £18,000.

Mark’s options are as follows:

Option 1: Buy the property as an individual

If lenders offer Mark a loan at 70% loan-to-value and a mortgage interest rate of 4:5%, his annual mortgage interest will be £14,175. Mark earns £18,000 in rental income, but his income tax is 40%, meaning he will pay tax on  £7,200. 

Mark gets a tax credit of 20% of his annual mortgage interest payment, for a total of £2,835 (20% of £14,175). Therefore, the tax on rental income he will be required to pay is £4,365 (£7,200 – £2835).

If Mark deducts the tax bill of £4,3365 and the annual mortgage interest of £14,175 from his £18,000 rental income, he will be left with a £540 deficit that he will be required to offset from other income sources. 

Option 2: Buy the property through a limited liability Company

Mark decides to buy a property through a company. However, limited mortgages are available to limited liability companies, so Mark could get a loan but had to pay an extra 5% in mortgage interest, bringing the payment amount to £15,750. 

If you deduct his mortgage interest from his rental income, his profit will be £2,250 (£18,000 – £15,750). His profit will be subject to a 25% corporation tax. Mark must pay £562 in tax, leaving him with £1,688 as net profit. 

So, instead of running into a deficit, as was the case with individual property buying, Mark will not have to offset any deficit. However, it is still possible for the entire profit to be wiped out due to other additional costs.

Let an Expert Help You Make the Right Decision

Setting up a limited liability company is a big deal and requires expert knowledge. It is important to consult an accountant or tax expert to make an informed decision. 

If you decide to set up a company, you will also need the expertise of an experienced mortgage broker to walk you through the entire process and connect you to lenders who will offer you good deals. 

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Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

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