Buy to let landlords are fighting the profit squeeze – by setting up as a business

Feeling the squeeze: Setting up a company to hold buy-to-let properties is not without pitfalls

Landlords are feeling the squeeze on their profits from all sides, thanks to rising mortgage rates and a successive withdrawal of tax benefits. But a growing number are finding a way to fight back – and boost their bottom line.

A record number of limited companies were set up last year to hold buy-to-let properties. Landlords are choosing to hold their properties within a company structure, rather than owning them as an individual, to enjoy the tax benefits afforded to limited companies but not individual taxpayers.

There are now 345,426 active limited companies that hold buy-to-let properties in the UK, up 50,000 on 2022, according to estate agent Hamptons. The number has grown every year since 2017.

However, setting up a company to hold buy-to-let properties is not without pitfalls, involves complexity and will not save all landlords money. Here, Wealth investigates how you can decide if setting up a company is worth consideration.

WHY ARE LANDLORDS GOING DOWN THIS ROUTE?

Holding investment properties within a company structure has always had tax advantages, but until 2017 buy-to-let was generally so profitable that few landlords bothered.

However, since then landlords have needed all the help they can get to turn a profit. The first major blow came with the introduction of so-called ‘Section 24’ in 2017, which stopped private landlords from being able to deduct all of their mortgage interest and arrangement fees from their rental income.

Basic-rate taxpayers still get a 20 per cent credit to apply against mortgage interest, but higher and additional rate taxpayers cannot claim any more of their mortgage interest as a business cost, even though they pay more tax.

However, this full tax relief is still available to landlords of any income who own property through a limited company. They can still claim all these costs against income to reduce their tax bill.

JJ Mitchell, 44, who owns more than 50 properties in the West Midlands, held properties as an individual when he bought his first in 2008, but in recent years switched to buying through a limited company. ‘If you’re going to be a portfolio landlord, or own multiple properties, I think a limited company is absolutely the way to go,’ he says. ‘You get to put the full mortgage interest against your turnover. Using a limited company has worked well for me.’

YOU COULD KEEP MORE OF YOUR PROFIT

If you hold a buy-to-let property as an individual, any money you receive from rent is treated as income and taxed at your marginal tax rate.

In other words, if you are a basic rate taxpayer, you will pay tax on it at 20 per cent; as a higher rate taxpayer you’ll pay 40 per cent; and additional rate at 45 per cent. The tax rates are slightly different in Scotland.

However, if you hold a buy-to-let through a limited company, any rent is treated as company income and is therefore subject to corporation tax, after deductions such as costs and business expenses. Corporation tax tends to be lower than income tax, at 19 per cent on profits up to £50,000 and rising to 25 per cent on profits above £250,000. However, remember that if you withdraw money from the business and pay it to yourself as an individual, you may have to pay income or dividend tax on what you receive.

Nevertheless, you are still likely to pay less tax overall, as you can control how much you pay out as an income in each tax year to keep your bill in check – and the dividend tax is lower than income tax, should you pay yourself that way.

The basic rate of dividend tax is 8.75 per cent; higher rate 33.75 per cent; and additional rate 39.35 per cent. There is also a dividend allowance of £1,000, but this is falling to £500 in the 2024/25 financial year.

You may be able to pay yourself a directors’ loan from the company, which is a tax-free way of withdrawing money from the company, but this is not straightforward and – as with most business tax decisions – should be done in consultation with an accountant. ‘For most landlords buying property today, going through a limited company is typically advised,’ says Craig Hopkins, an accountant and founder of Property Accounts, which specialises in property investment.

‘However, a lot of people don’t really understand how companies work. You pay tax on profits in the company and then you pay a second level of tax when you take money out of the company at a personal level – except if you are repaying your loan account.’

IS IT HARDER TO GET A MORTGAGE?

Getting a loan to buy a property through a company used to be much trickier. But the number of loans available has soared since this strategy started to grow in popularity.

There are 1,592 mortgage products available to limited companies, compared with 567 in 2019, according to figures from Mortgage Finance Brokers. Around three-quarters of the applications it receives are from limited companies, up from just half in 2019. Lenders were also hesitant to lend to companies without a track record but now landlords find it much easier to get a loan even on their first purchase through a company.

You may also be able to borrow more through a limited company, says Mortgage Finance Brokers. That is because companies are required to show the rental income they receive is at least 125 per cent of the mortgage payments, compared with 145 per cent for individual loan applicants.

Mark Wilkinson, 53, from Surrey, bought his first buy-to-let property six years ago and now owns eight properties in South Wales – mostly three-bedroom houses. Mark, an entrepreneur, says he and his wife have limited pension savings and see property investment as a way to provide a retirement income. All the properties are owned through a limited company. The cheapest price he paid for one of his three-bedroom houses was £45,000 six years ago and the most expensive was about £150,000.

‘These buy-to-let properties did provide us with a nice few thousand pounds a month in income, although obviously at the moment with interest rates high this has gone against us.

‘Rents haven’t gone up in line with the rise in interest rates. But we plan to be in it long-term and the limited company structure works for us. I believe I’m an ethical landlord – I don’t want to sell properties where people have made it their home,’ says Mark, who also works as a life coach and is author of Life Remixed.

A LIMITED COMPANY WON’T BE FOR EVERYONE

There are cases where it may make sense to still buy properties as an individual. If you have just one or two properties and are a basic-rate taxpayer – and are likely to remain so even after rental income is added to your overall annual income – a limited company may not be worth it.

Your age will play a factor, as someone reaching retirement age will have a higher degree of certainty over their earned and rental income compared to a younger person who may change jobs, careers and tax bands in the years ahead. Rental increases over time will also need to be factored in.

There is more bureaucracy and obligations with a company, such as having a separate bank account and producing full statutory accounts. Accountancy fees for a limited company are typically more than £1,000, compared to doing your own accounts for free as a sole trader or hiring an accountant for a couple of hundred pounds.

Taking out a mortgage through a limited company is generally straightforward. However, interest rates are likely to be around one percentage point higher than if you were taking out a buy-to-let mortgage as an individual. You may also be stung by high fees – ten per cent of the loan amount in some cases.

You may end up paying more tax, too, if you sell a property and have made a large profit. As an individual selling an investment property, you pay capital gains tax of 28 per cent on the difference between the purchase price and sale price (after deductions such as legal fees and estate agent fees). There is also an allowance of £6,000 per person, although this is falling to £3,000 in the 2024/5 tax year.

Capital gains tax is not charged on profit made through a company and the capital gains tax allowance does not apply to companies. Any profit made will suffer corporation tax of at least 19 per cent plus further taxes if you extract the profit on sale as dividends.

Mohammed Quadri, 46, an accountant from London, says the company structure works well for landlords, although he advises new investors to consider whether property is right for them. Even with the benefits of owning through a company, it can be very challenging to make a profit.

Mohammed owns three houses in London through a limited company, which he has owned since 2021. However, he’s not sure how long he will stay in property investing because the recent rise in interest rates has meant he is currently not making any money.

‘The limited company structure offers real benefits. However, I’m thinking about whether it’s worth it long-term. It is quite stressful, the legal process is completely one-sided towards tenants. Making money from buy-to-let is definitely harder than people realise,’ he says.

If you are thinking of buying a property through a new limited company, it’s worth speaking to an accountant first. They will help you think through the key considerations and factors you may not have considered.

Finally, if you already have a company that you use for another business, it tends to be better to keep this separate from any buy-to-let properties you own, says Ian Spreadbury, at accountancy firm Providence Financial.

‘It is better to keep property investment separate from your normal business,’ he says. ‘That is because if you’re running your own business, you’re operating a trading business, whereas holding properties to rent out is considered by HMRC as an investment business. It is simpler to keep these separate.’