Property Investment – Should You Buy Privately or Through A Company?

property investment

Should Private Landlords be Setting Up Limited Companies?

Setting up a limited company is seen by many as the smart way to avoid increased taxes on buy to let. However, it does not make sense for everyone.     

The new tax rules for buy to let landlords caused a stir in the property and investment communities when they were announced in 2015. A year after coming into effect, buy to let is still as popular a form of investment as it has ever been, but landlords have sought out ways to reduce their tax burden and maximise their yield.

Reduced tax when you buy to let through a company

Situated in the heart of commuter country, Romford is a property hotspot in the buy to let market, so Romford letting agents, Keystones, has a better view than most of what is happening. They have seen a growing trend towards buy to let landlords setting up a limited company for the purpose of purchasing and / or holding their rental properties.

The benefit of doing so is that any and all expenses relating to the property can be written off prior to calculating the tax liability. This results in a significantly lower tax bill than when the property is in the hands of a private individual, who is required to go through a more convoluted process of paying tax on the entire rental income, then seeking to reclaim the VAT afterwards.

For an individual earning an average salary and in addition owning an average rental property with average expenditures and rental income, the annual tax liability is around £800 less when the property is owned by a limited company.

On the face of it, the numbers seem to make sense. Unfortunately, there are other factors to consider.

Increased mortgage costs?

The biggest problem that the limited company route presents is that mortgage repayments will inevitably be higher. Looking again at that average rental property with an average 75 percent interest only mortgage, an individual is likely to be paying a rate of less than two percent, whereas the limited company will struggle to find anything better than around the 3.4 percent mark.

When you factor this into the equation, the mortgage repayments come to almost £5,000 per year for the company, compared to around £2,800 for the individual. Suddenly that £800 per year tax saving does not look like such a good deal.

When does it become worthwhile?

Calculating your income, tax liabilities and outgoings is a complex activity and depends on so many factors that is can be dangerous to generalise. However, with that caveat in mind, the overall trend according to experts at Private Finance is that the more properties you own, the more attractive the limited company route begins to look. Taking all the variables at the national average, here is the net benefit or loss from placing your buy to let in a limited company:

Number of properties           Net gain (loss) from using a limited company

                   1                                                          (£1,370)

                   2                                                             (£820)

                   3                                                             (£280)

                   4                                                               £270

While on average, the point at which forming a limited company becomes worthwhile is with at least four properties, there are so many variables to consider that it is vital to take expert legal and financial advice before making any decision.

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