In the United Kingdom, the Buy to Let (BTL) sector has been a popular choice for investors looking to capitalise on the rental property market. Over the years, many property investors have chosen to set up a Buy to Let Limited Company to manage their rental properties, offering numerous advantages and financial benefits.
This article aims to explore what a Buy to Let Limited Company is, the set-up process, its benefits, and drawbacks, for investors looking to venture into this domain.
Defining Buy to Let Limited Company
A BLT Company is a form of a limited company specifically established to hold and manage residential properties for rental purposes. Instead of purchasing properties in their individual names, property investors create a limited company, and this company becomes the owner of the rental properties. The company structure separates the personal assets of the investors from the business assets of the rental properties, limiting personal liability and risk.
How to Set Up Buy to Let as a Limited Company
Setting up a buy to let limited company requires adherence to the Companies Act 2006 and specific procedures to register a company in the UK. The IN01 Form serves as the registration document for companies in the UK. To successfully incorporate a buy to let a limited company, several essential details are required:
1. Business Name
Choosing a unique and appropriate name for the company is crucial. The name should end with “Limited” or “Ltd,” or the Welsh equivalents, and it must not be already registered with Companies House. Additionally, names implying an association with official bodies, the monarchy, or a charity cause may require prior approval. To ascertain whether the chosen name is available, it is advisable to use Company name availability checker.
2. Capital & Initial Shareholdings
Providing a Statement of Capital and Initial Shareholdings is necessary, representing the snapshot of the company’s share capital at the time of registration. This includes the total number of shares, their nominal value, class details, and the amount paid or unpaid on each share.
3. UK-Based Registered Office Address
A physical address within the chosen jurisdiction (England and Wales, Scotland, or Northern Ireland) must be provided as the registered office address. This address is essential for receiving all official communications related to the company.
4. Company Officers
The company’s officers, such as directors and shareholders, play vital roles in managing and owning the company. Directors are responsible for overseeing the company’s activities, while shareholders provide financial support through shareholding. There must be at least one director, which you can be yourself.
5. MOA and AOA
The Memorandum of Association (MOA) acts as the company’s constitution and outlines its relationship with shareholders whereas the Articles of Association (AOA) is the internal rulebook governing the company’s operations, rights, and responsibilities of directors and shareholders.
6. SIC Code
The company’s principal business activity is identified through the Standard Industrial Classification of Economic Activities (SIC Code), a 5-digit number representing the nature of the company’s primary engagements. Here are some of the SIC code used by the buy to let companies:
- 68100 – a company involved in buying or selling properties.
- 68209 – a business that lets or operates leased properties.
- 68320 – the management of property.
- 68201 – property renting or running housing association properties.
Benefits of Buy-to-Let Limited Company
Investing in property through a Buy to Let Ltd Company offers many advantages, making it an attractive option for certain investors. Some of these benefits include:
Limited Liability
One of the primary advantages of operating through a limited company is that the investors’ personal liability is limited. In case of any financial or legal issues related to rental properties, the liability is restricted to the assets held within the company, safeguarding the investor’s personal wealth.
This separation provides financial security and peace of mind, making it an attractive option for property investors.
Corporation Tax vs. Income Tax
The contrast in tax treatment is a key factor driving the popularity of Buy-to-Let Limited Companies among investors. Holding properties within a limited company exposes rental income profits to corporation tax, which is generally lower than the income tax rates applicable to individual landlords.
Investors pay corporation tax on their profits at a much lower rate of between 19 and 25%, thereby avoiding income tax rates that can reach up to 45%. Therefore, by directing rental income through the company, investors can achieve substantial tax savings, especially for higher-rate taxpayers.
Check our Know Your Tax Rates and Reliefs for 2023/24 for more detail.
Mortgage Interest Deduction
Operating as a limited company allows property investors to claim mortgage interest as a tax-deductible expense, further reducing the taxable profits. The Interest Relief Restriction Section 24 applies to individual landlords which means that individual landlords can no longer deduct mortgage interest from rental income before calculating taxable profits.
As a result, investing in property through a limited company can offer a considerable advantage in terms of tax efficiency and overall profitability, especially for higher-rate taxpayers affected by the changes in individual landlord tax relief rules.Instead, landlords receive a basic rate tax reduction on their mortgage interest costs.
Tax Planning
If you envision transferring ownership of your rental properties to family members down the line, opting for a limited company structure could prove beneficial. The process of transferring ownership is simpler and more tax-efficient when it involves a limited company rather than passing on individual properties.
The property remains under the ownership of the limited company, and only the directorship of the company changes.
This may potentially safeguard the transaction from Inheritance Tax, Stamp Duty, and Capital Gains Tax implications. Planning in this manner can offer you greater peace of mind and better protection for your buy-to-let investment as you consider passing it on to your family.
Dividend Income
Investing in buy-to-let properties through a limited company provides you the flexibility to receive a portion of your income in the form of dividends. Dividends are subject to different tax rates than PAYE income, providing potential tax benefits for shareholders.
You can enjoy a tax-free allowance of £1,000 on dividend payments for the tax year 2023/24. Dividends exceeding these thresholds will be subject to taxation.
Drawbacks of Buy-to-Let Limited Company
While buy to let limited company offers various advantages, it is crucial to be aware of the potential drawbacks before deciding whether it is the right strategy for you.
Higher Mortgage Costs
Financing a buy to let property through a limited company can be more challenging than obtaining a mortgage as an individual. Most lenders tend to offer more limited options and often require higher interest rates and deposit requirements for limited companies. This could result in reduced profitability and potentially limit access to suitable investment opportunities.
Administrative Burden
One of the primary drawbacks of opting for a buy to let limited company is the heightened complexity and administrative burden compared to individual ownership. Limited companies require proper setup, registration, and ongoing maintenance, necessitating the involvement of legal and financial professionals. Additionally, annual filings, record-keeping, and compliance with company law can be time-consuming and costly.
Higher Initial Costs
Establishing and maintaining a limited company comes with costs that can be significantly higher than acquiring a property as an individual. These costs include legal fees, accountant fees, registration fees, and ongoing administrative expenses. As a result, the initial financial outlay can be a deterrent for some investors, particularly those with a limited budget.
No Capital Gains Tax (CGT) Allowance
When individuals’ own properties directly, they benefit from an annual CGT allowance of £6,000 for 2023/24, which allows them to make a certain amount of capital gains tax-free each tax year. However, limited companies are not eligible for this allowance which means that any capital gains made on the sale of a property will be subject to CGT without the benefit of the tax-free allowance.
As a result, investors may face a higher tax liability when disposing of properties through the company, reducing the overall returns on their investment compared to holding the property personally.
Double Taxation
When operating a limited company, profits are subject to corporation tax.
However, if you wish to withdraw profits through a salary or dividends, you will also incur income tax. To avoid the burden of double taxation, it is crucial to consider effective strategies for mitigation. Seeking professional tax advice and devising a well-thought-out strategy from the outset is essential, especially if you anticipate regularly withdrawing profits from the company.
For More Information, Read our article ‘What is More Tax Efficient – Pay Myself a Salary or Dividends’, which discusses the tax efficiency of paying yourself a salary versus dividends.
Conclusion
While investing in buy to let properties through a limited company offers certain advantages, it is essential to consider the associated drawbacks. Ultimately, the decision should be based on individual circumstances, financial goals, and a thorough understanding of the implications involved in owning buy-to-let properties via a limited company.
