September 13, 2023 1:16 pm

Insert Lead Generation
Nikka Sulton

Investing in buy-to-let (BTL) property can be a profitable venture offering financial stability. You have the choice of being a private landlord or establishing a limited company for your property business. This guide outlines the distinctions between these approaches, helping you determine the most suitable path for your needs.

Numerous entrepreneurs contemplate entering the property market at some stage. One of the initial dilemmas is whether to purchase property individually or via a limited company. Each choice presents advantages and disadvantages, which we’ll explore in this article, along with key factors to bear in mind.


What is a buy-to-let property company?

A buy-to-let property company operates as a limited company for acquiring rental properties.

As a landlord, you face two options: purchasing properties individually and dealing with income tax or acquiring them via a limited company and managing corporation tax.

For several landlords, establishing a limited company for their buy-to-let investments offers potential tax advantages. Moreover, rental income is treated differently, as it becomes the property of the company. This arrangement allows you to draw a salary from the company or receive rental income in the form of dividends.


How to set up a property company

If you’ve decided to establish a property company, your initial step is to register with Companies House. The online registration process incurs a fee of £12, payable by debit or credit card, and typically results in your company’s registration within 24 hours.

Selecting a company name is a critical aspect of this process. The name must be unique, sufficiently distinct from existing companies, and free from any misleading elements. Furthermore, you’ll need to specify an address for your company, which can be either your business location or your residential address. Appointing directors and shareholders, along with providing a description of your business activities, is also essential.

If you choose online registration, you can simultaneously register for corporation tax. Otherwise, you must complete this within three months of commencing business operations to facilitate the annual filing of your company tax return.

For limited companies, it is advisable to establish a dedicated business bank account, ensuring clear separation between personal and business finances. Maintaining accurate records is crucial for the timely filing of accounts and tax returns.

Taxation on rental income can be intricate, so it’s essential to grasp the fundamentals. Private landlords are subject to a tiered tax system:

  • Earnings up to £12,750 are not taxed due to the personal allowance.
  • Income between £12,571 and £50,270 incurs a basic rate of 20%.
  • Earnings between £50,271 and £150,000 are subject to the higher rate of 40%.
  • Income exceeding £150,000 faces an additional rate of 45%.

In contrast, limited companies currently pay a flat rate of 19% in corporation tax, effective until April 2023. Subsequently, the top corporation tax rate, applicable to profits exceeding £250,000, will increase to 25% in April 2023.

Companies with taxable profits below £50,000 continue to pay the existing 19% rate. Those with profits ranging from £50,000 to £250,000 will be subject to rates varying from 19% to 25%, depending on the amount of marginal relief they qualify for. Additional details on this can be found on the website.


How do I get funding to start a buy-to-let company?

When it comes to financing your new business venture, there are several avenues to explore.

A commonly chosen option is a business loan, allowing you to access a lump sum, typically ranging from £1,000 to £3 million. You then repay this sum in manageable monthly instalments, inclusive of interest. To secure a business loan, it’s imperative to craft a robust business plan detailing your objectives and the intended utilisation of the funds. For commercial properties, commercial mortgages emerge as an appealing lending choice.

Many major banks provide unsecured business loans, permitting you to borrow without collateralizing business assets. While secured loans typically offer higher borrowing limits, they necessitate using an asset, such as property, as collateral. In the event of loan default, the lender possesses the authority to sell the asset to cover the outstanding debt. Due to the reduced risk for the lender, secured loans often come with more competitive interest rates.

For startups trading for no more than 36 months, startup loans present a viable option. The primary source for these loans is the UK government-backed startup loan scheme.

If you find yourself uncertain about the most suitable funding avenue for your business, Swoop’s team of experts is at your disposal. They can discuss your options and assist you in identifying the most fitting solution. Register with Swoop to embark on your financing journey.


What are the buy-to-let tax changes I need to consider?

April 2017 marked the onset of significant tax alterations, leading numerous landlords to consider the limited company path.

Previously, landlords enjoyed the privilege of deducting the entire mortgage interest from their rental income, effectively lowering their tax liability. However, changes in buy-to-let mortgage tax relief have unfolded over time. Starting from April 2020, landlords receive a tax credit equating to 20% of their mortgage interest payments, as opposed to deducting costs directly from their tax bill. Consequently, landlords subject to income tax can no longer offset expenses against their tax liability, resulting in a reimbursement of only 20% of their mortgage interest expenditure.


How do I get funding to start a buy-to-let company?

Various financing options are accessible when contemplating your business’s financial needs.

A prevalent choice is a business loan, enabling you to borrow a lump sum, typically ranging from £1,000 to £3 million. Repayment occurs in monthly instalments, encompassing accrued interest. To secure a business loan, a robust business plan delineating your objectives and fund utilization is imperative. For commercial ventures, commercial mortgages stand as an attractive lending avenue.

Unsecured business loans, offered by numerous mainstream banks, don’t require collateral, reducing risk. Conversely, secured loans necessitate asset backing, typically property, enhancing borrowing capacity but risking asset seizure in case of non-repayment. The reduced risk for lenders can lead to more competitive interest rates.

Startups, operational for less than 36 months, can explore startup loans, often facilitated through the UK government-backed startup loan scheme.

If you’re uncertain about the optimal funding route, Swoop’s expert team is available to explore your choices and guide you towards the most suitable solution. Commence your journey by registering with Swoop.

Is property subject to CGT?

When a private landlord sells a property, they become liable for Capital Gains Tax (CGT), applicable beyond the current £12,300 allowance. Notably, this allowance is set to decrease to £6,000 in April 2023 and further down to £3,000 in April 2024.

In contrast, if you’ve established a limited company for property acquisitions, your tax obligation shifts from CGT to corporation tax. This shift is viewed as profit extraction from your business. It’s prudent to evaluate whether paying CGT or corporation tax is more cost-effective, contingent on the anticipated profit from property sales.



MORE Buy To Let blogs HERE: 

Buy-To-Let VS Residential Mortgage

Is Buy-to-Let Still Viable in 2023?

Tips for First-Time Buy-to-Let Investors UK

How to Choose the Right Buy-to-Let Property

Essential Guide to Buy-to-Let Home Insurance in the UK

Getting a Buy-to-Let Loan with Poor Credit

The Benefits of Buy-to-Let Mortgages

Can My Mortgage Be Interest-only?

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}