Investing in Property Through a Limited Company

Have you ever wondered what the best way to get into the buy-to-let market is. Theses days there are more and more investors opting to invest through limited liability companies. But is this a wise path to take and what exactly does it entail?

With the aftermath of the global pandemic and the current spiralling inflation rate reaching a level not seen for forty years, the need for buy-to-let property investors to find ways to minimise costs and maximise profits has never been more important.

Taking the state of the economy into account, it is hardly surprising that the number of investors buying property through limited companies is on the increase in an attempt to reduce the risks associated with property investment. Almost 50% of all properties, bought with the intention of renting out, were bought through a limited company in 2021.

In recent years, acquiring a buy-to-let property in the personal name of the landlord was significantly more lucrative due to tax breaks, as they were allowed to deduct finance costs and mortgage interest from the taxable rental income. This led to thousands in savings resulting in bigger profits which was a positive incentive for people looking for alternative ways to save other than more traditional methods.

These tax benefits, however, came under scrutiny by the government, resulting in new rules being formulated to regulate the buy-to-let market and change the gains that landlords are able to make. The fist adjustment was to introduce a 3% stamp duty tax surcharge on additional buy-to-let properties and lower the amount of relief they could claim against mortgage interest to the current 20% basic rate tax credit.

As a direct result of these changes, which hit property investors bottom line, many sought to set up limited companies in order to find a new route to saving money and increasing profit.

What are the Benefits?

There are three major benefits to setting up a limited company for the purpose of purchasing buy-to-let properties:

  1. You can offset interest charges against rental income profit – the corporation tax for up to £50,000 is taxed at a rate of 19% (as long as you have no other companies) which can result in significant savings. To compare, if the property was bought under a personal name the rate would be 40% or even higher at the higher tax rate.
  2. Way of extracting money from the business is more flexible than it would be under a personal name. This can be in a mix of dividends, wages and director loans.
  3. Increased personal protection is an attractive benefit, in that, due to the limited liability, the investors personal assets would not be at risk.

Things to Consider

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While investing in buy-to-let property through a limited company is very appealing and comes with many benefits, it is important to consider the responsibility that comes with taking this route. Directors of limited liability companies have legal requirements that they are responsible for, including:

  • Registering the business with Companies House
  • Filing articles of association
  • Filing compliant accounts with Companies House
  • Maintaining company records
  • Ensuring any changes are reported (e.g. address, shareholders etc)
  • Filing corporation tax return
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