Thinking of purchasing a buy to let property as a limited company?

Date: 26/03/2020

55% of landlords intend to purchase their next buy to let property within a limited company structure1 . If you’re thinking about doing this, there are many factors that you’ll need to keep in mind.

These are some of the key areas to consider:

Mortgage rates

Interest rates on limited company mortgages can be higher compared to standard buy to let products.

Stamp Duty

The same level of Stamp Duty Land Taxwill normally apply when purchasing under a limited company, compared to personal ownership. 

Tax Relief

Finance costs, including mortgage interest, remain tax deductible for Limited Company landlords. 

Corporation Tax

Limited company landlords pay corporation tax, not income tax, on their rental income. The current rate of corporation tax is 19%.

Profit extraction

The way rental income is extracted can make an impact on profit. See the ‘Profit extraction’ table below for a worked example. 

Capital Gains

Limited company landlords pay corporation tax of 19% on their capital gains and there is no tax-free allowance. Lower and higher rate taxpayers will pay 18% and 28% respectively. 

Transfer of Property

As the company purchases the property, Stamp Duty Land Taxmay be payable. The individual may have to pay Capital Gains Tax. 

Seeking professional tax advice is essential, as this will help you determine the most appropriate structure for your individual circumstances.

Mortgages are secured on your property. You could lose your property if you do not keep up payments on your mortgage.

Cashflow scenario 2020/21

The example scenario below compares limited company to personal owners in the basic and higher rate tax brackets. This shows a basic rate taxpayer is better off as an individual, but a higher rate taxpayer would achieve a higher annual return under a limited company.

If you scale this across a large portfolio and over a longer time frame, the financial impact could be substantial.

  Basic rate taxpayer Higher rate taxpayer Limited company
Gross monthly rent from buy to let property
Mortgage interest rate (example rate)
Monthly mortgage cost (with a £100k loan)
Running costs
Income before tax deducted
Tax rate  20%  40%  19%
Gross tax (before mortgage interest relief)  £1,600  £3,200 n/a
Mortgage interest relief
Tax payable £1,100 £2,700 £855
Net profit £4,400 £2,800 £3,645

Calculation based on current tax rates. This example scenario is illustrative only.

Profit extraction

Profit extraction from a company is another factor. This can be done in multiple ways, including dividends, salary, pension contribution and remuneration of a director’s loan.

The example scenario below uses dividends to extract the net profit figure of £3,645. Each director is permitted an annual dividend allowance of £2,000 before tax is payable. Beyond that, the profit is taxed at different rates depending on their income tax band.

2 x shareholders/directors
1 x shareholder/director
Basic rate taxpayer Higher rate taxpayer
Value of dividend
Dividend allowance  £4,000
Taxable dividend  £0
Dividend tax rate n/a 7.5% 32.5%
Dividend tax payable n/a £123 £535
Net income £3,645 £3,522 £3,110

Calculation based on current dividend allowance and dividend tax rates. This example scenario is illustrative only.

Want to apply?

If, after seeking professional tax advice, you’d like to apply for a TMW Limited Company mortgage, visit our dedicated limited company page to see our rates and eligibility.

1 BDRC Q4 2019 BTL Barometer
2 Land and Buildings Transaction Tax in Scotland and Land Transaction Tax in Wales