If you’ve been keeping an eye on the property market, you’ve probably noticed a significant shift in how landlords are managing their investments. The number of landlords opting for limited company buy-to-lets has soared in recent years. But is this something every property investor should consider?
Buy Association looked into the details. Recent data reveals that there are now a whopping 615,077 properties owned by limited company buy-to-lets—an impressive 82% increase since the end of 2016. And if you think that’s striking, 2023 saw more limited companies set up for buy-to-lets than any other year. Clearly, this trend isn’t just holding steady—it’s picking up speed.
Interestingly, this approach is gaining traction among smaller landlords too. In fact, the number of companies holding just a single property jumped by 22% last year alone. Aneisha Beveridge, Hamptons’ head of research, described this as a “long-term commitment from landlords” aiming to stay competitive in the private rented sector.
However, despite its growing popularity, switching to a limited company structure isn’t necessarily the best option for everyone. There are a few key factors to consider before making the leap.
Why Consider a Limited Company Buy-to-Let?
So, why are so many landlords making the switch? One major reason is the protection that comes with ‘limited liability.’ Essentially, when you set up a limited company, it becomes its own legal entity, which means you’re not personally on the hook for any financial losses. That’s a pretty big safety net.
Another advantage is that a limited company continues to exist even if shareholders (like the landlord) retire, resign, or pass away. This continuity can be a significant benefit, especially when considering potential tax implications, such as inheritance tax.
For property investors, the tax differences are particularly appealing. A limited company buy-to-let allows you to deduct 100% of mortgage interest costs from your income, as it’s considered a business expense—something individual landlords can no longer do. For higher-rate taxpayers, this can be a game-changer, as rental income within a limited company is taxed at the corporation tax rate (25% for profits over £250,000, or 19% for profits under £50,000 as of the 2023/2024 tax year) rather than the higher income tax rates.
The Potential Downsides
But before you jump in, it’s important to weigh the downsides. For starters, if you’re a basic-rate taxpayer, the costs of setting up and running a company—like accounting fees—might offset any tax savings you’d otherwise gain. Additionally, mortgages for limited company buy-to-lets often come with higher rates, and you might find fewer lenders to choose from since it’s a more niche product.
If you decide to sell your rental property down the line, be prepared to pay the full amount of capital gains tax (CGT) on any profits. Unlike individual landlords, who can currently claim an allowance of £6,000 before CGT kicks in (set to drop to £3,000 in 2024/2025), limited companies don’t get this break.
While it’s true that more lenders and products are becoming available as the trend grows, the reality is that running a limited company often requires more legal and tax assistance, adding to your expenses.
Should You Make the Switch?
Ultimately, deciding whether to operate as an individual or through a limited company comes down to your personal circumstances and long-term goals. It’s not a one-size-fits-all decision. Thorough research and professional advice are crucial to making the choice that’s right for you.
As with any major financial decision, understanding both the benefits and the potential pitfalls will help you navigate the complexities of property investment in today’s market.