Some people decide to purchase buy-to-let properties as individual investors. Others take the option of buying buy-to-lets a different route by setting up a limited company. The financial implications of getting a buy-to-let through a limited company are extremely different compared to individual investors. 

As an independent landlord insurance brokerage that is always up to date with all things landlord related, we at CIA Landlords have looked at the pros and cons of buying property through a limited company. 

Image of the paperwork for a house sale.

What are the pros of buying property through a limited company? 

First, let’s take a look at the pros of buying a property through a limited company for landlords. 

Reduced tax rates

One standout benefit of choosing to buy a property through a limited company is that your rental earnings will be subject to corporation tax of 25%, as opposed to the income tax rate that applies to individual property investors which is 20-45% depending on what you earn. 

If your annual earnings (including rental income) are £50,001 – £150,000 in the UK you pay 40% income tax, this goes up to 45% if you earn £150,000+. So, this difference in tax rates means that you could save thousands of pounds by setting up a limited company to buy a rental property. 

Mortgage interest tax relief 

In the past, landlords used to be able to deduct any mortgage interest from monthly rental income as a way to reduce their tax bill. However, since April 2020, you are no longer allowed to do this but rather receive a tax credit based on 20% of your mortgage interest payments. This means that some individual property investors can stand to pay more tax than before nowadays.

Whereas mortgage interest is treated by the taxman as a business expense when you buy a buy-to-let property through setting up a limited company, and as a result, you receive full tax relief on your rental income. 

Expand your property portfolio faster

Are you an ambitious investor hoping to build a property portfolio in a fairly short timeframe? If you keep your profits in a limited company, you will be able to fund future purchases with no income tax, until you choose to withdraw profits from the company. Holding your rental earnings within the limited company also helps to protect them from risks and tax liabilities, which allows you to repay any debt and expand your property portfolio much quicker. 

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Lower inheritance tax 

You may be a landlord thinking about legacy investments and leaving one of your rental properties behind for your children to inherit. Transferring a property down to one of your family that is owned through a limited company is much simpler compared to a privately held property. Passing it down this way means the property can be protected from stamp duty, inheritance tax, and other capital gains tax liabilities.

The investment property will be separate from your personal financial affairs

Finally, another advantage of buying an investment property with a limited company is that it is legally separate from your personal financial affairs and this ensures you are not personally liable for losses like individual property investors.

What are the cons of buying rental property through a limited company? 

On the other hand, there are potential downsides to buying a buy-to-let property through setting up a limited company, and here we delve into a few of them.

Lower availability 

Looking for a mortgage as a limited company can be harder work because there are generally fewer mortgages available to you than you would have as an individual property investor. Mortgage interest rates are also often higher for limited companies. 

You still pay income tax to access your rental profits

Setting up a limited company to buy a property as a landlord doesn’t mean you sail through the whole process without paying any tax. After buying a property you rent out to tenants through a limited company, you will still have to pay income tax whenever you want to access and take out your rental profits. 

The extra fuss and cost involved 

It can take up a lot of your time and involve more paperwork and extra costs. For example, you may need to hire an accountant to keep things above board and file the annual accounts. 

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The best decision for you will depend on your personal financial situation

Ultimately, the best investment approach for you buying a buy-to-let property as a landlord will greatly depend on your personal financial situation. If you are unsure or on the fence, get in contact with a tax advisor expert. 

One thing is for sure, you will need to cover your back by getting landlord insurance when buying a rental property. Here at CIA Landlord Insurance, we work with a broad range of reputable landlord insurance providers who offer competitive prices for both limited companies and private property investors. Intrigued? Contact us today by calling 01788 818 670 or get a quick quote.

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