Buy-to-let business time: Why tens of thousands of landlords are forming limited companies

More landlords than ever set up a limited company in 2024, with more than 46,000 new registrations between January and September of companies created to hold rental homes.

If nothing else, the numbers show just how popular buy-to-let remains as a reliable strategy for building long-term wealth and financial freedom.

Still, the landscape for landlords has shifted a lot over recent years, and extensive rental reforms require an updated approach to manage your investments effectively and profitably.

If lower taxation, better personal asset protection, a multi-property portfolio and easier inheritance planning sound good to you, using a limited company to own your rental homes could be a smart move.

So in this guide, we’ll explore the ins and outs of establishing and running a limited company for your buy-to-let business, including:

• The benefits of limited company ownership
• Setting up a limited company
• Buying properties through a limited company
• Buy-to-let mortgages for limited companies
• Managing a limited company’s finance

Before taking the plunge, it’s essential to know if a limited company structure aligns with your personal goals, so let’s take a look at whether it’s right for you.

THE BENEFITS OF LIMITED COMPANY OWNERSHIP

There are many potential advantages of owning rental homes through a limited company, from tax savings to personal protection and inheritance planning. Here’s a brief rundown:

• Unlike personal landlords, who can no longer deduct mortgage interest costs from taxable rental income, limited companies can claim the total amount as a business expense.
• Separating your property income from your personal income can help you avoid or delay tipping into a higher income tax band.
• Companies pay corporation tax instead of personal income tax, and profits can be reinvested tax-free to fund deposits for new properties or renovations on ones you already own.
• Holding rental homes through a company can offer greater protection for your personal assets in case the business hits financial difficulties.
• Passing on properties through company shares can substantially reduce the inheritance tax liability for your beneficiaries.

While there are clearly plenty of benefits, it’s wise to remember that improving your knowledge of owning a limited company will help you make informed decisions and run your business well.

SETTING UP YOUR LIMITED COMPANY

Starting a limited company for buy-to-let properties requires some planning to ensure you comply with legal and financial regulations. It’s a pretty straightforward process, and here’s an overview:

• Decide on the number of directors and shareholders. You can act as both, but involving family members or business partners can offer tax perks around shared income or inheritance planning.
• Register your company online with Companies House. You need to pick a unique name, appoint at least one director, specify a registered address (this can be your home), and pay the £50 fee.
• Open a business bank account to manage your rental income and expenses, and to keep your personal finances separate for simplified accounting.

If you do all of this before you go out house hunting, and speak to a lender or broker to be sure you can finance a purchase, you’ll be ready to move on a property as soon as you find the right one.

BUY-TO-LET MORTGAGES FOR LIMITED COMPANIES

Securing a buy-to-let mortgage through a limited company follows many of the same principles as a personal residential mortgage but comes with different lending requirements, including:

• Most lenders expect a deposit of 20–25% (some may require 30% or more, especially for new landlords), with a predicted rental income of at least 125% of the mortgage payments.
• Lenders check the credit history, personal income, and age of the company directors to assess their eligibility for a loan, along with the company’s financial records.
• You’ll also need to provide proof of the company’s incorporation, and the company must have been set up with the purpose of buying, selling or managing property.

Since many lenders offering limited company mortgages only operate through intermediaries, working with a knowledgeable mortgage broker is essential for a smooth application.

BUYING & SELLING PROPERTIES THROUGH A LIMITED COMPANY

The legal process and Stamp Duty costs for properties bought and sold as a limited company are much the same as buying as an individual. Still, there are some other aspects to consider, including:

• Mortgages for limited companies often have slightly higher interest rates than personal ones. However, lenders are becoming more competitive as the market grows.
• A limited company structure can help you purchase properties with other people if you want to bring in other partners or shareholders.
• Companies pay Corporation Tax on their profits, and the current rates are 19% for profits up to £50,000, 25% for profits over £250,000, and marginal relief for those in between.

Because companies don’t pay Capital Gains Tax, they also don’t receive the annual Capital Gains Allowance that private landlords get, so bear this in mind when deciding which strategy you prefer.

MANAGING A LIMITED COMPANY’S FINANCES

While owning a buy-to-let limited company has valuable financial benefits, it also comes with the following extra obligations around keeping your accounts in order and meeting tax deadlines:

• All companies must file annual accounts with Companies House, first within 21 months of registration and then 9 months after the end of each financial year.
• You also need to file a Company Tax Return every year with HMRC for Corporation Tax no later than 12 months after your company’s accounting period ends.
• Any salary or dividends you take should be declared on your personal tax return each year and are subject to income tax and dividend tax at your individual tax rate.

If you’ve never owned a limited company, it’s wise to ask an accountant to handle these tasks correctly and on time to avoid unnecessary penalties or simple overwhelm.

Are you a landlord in the Wilton & Salisbury area?

Whether you’re looking for your next buy-to-let or you’d like to improve the performance of your existing portfolio, we’re here to help you enjoy a profitable property business and achieve your financial goals.

Call us on 01722 580059 or message us at info@piccoloproperty.co.uk for a no-strings chat with our team and some friendly expert advice.