What does “buy-to-let” mean?

Buy-to-let is a strategy in property investment wherein an individual or company acquires real estate with the primary goal of leasing it to tenants for rental income. While the term encompasses both commercial and residential properties, this tax guide will specifically focus on residential properties. Buy-to-let properties are commonly known as investment properties.
Distinguishing them from residential properties intended for personal occupancy, buy-to-let properties, when purchased with a mortgage, typically come with restrictions preventing the buyer from residing in the property. They also differ from furnished holiday lets, which allow both personal use and rental.

Is it permissible to acquire property through a limited company?

Certainly, purchasing property through a limited company is a viable option. A limited company operates as a distinct legal entity, granting it the capacity to possess assets, including real estate. Moreover, opting for property acquisition through a limited company affords the advantage of limited liability protection. In practical terms, any losses or legal complications arising from the property are attributed to the company rather than to you personally. It’s important to note, however, that limited liability does not shield you from legal consequences in cases of negligence or wrongful conduct while fulfilling company responsibilities.

What motivates individuals to opt for property acquisition through a limited company?

The surge in landlords choosing to purchase property through a limited company can be largely attributed to the introduction of Section 24. This legislation, implemented in 2017 and fully in effect by April 2020, disallows landlords from claiming mortgage interest costs as an expense to reduce rental profits for income tax purposes. Section 24 specifically impacts private landlords with individually held properties but does not apply to limited companies, creating a favourable loophole. Beyond Section 24, there are additional reasons driving individuals to choose this approach, including:

1. Investment as a Business: Some landlords view property ownership not merely as a supplemental income source but as their primary business. For those heavily reliant on property as their main source of earnings, purchasing through a limited company becomes a strategic business decision.
   
   
2. Limited Liability Protection: Opting for property ownership through a limited company provides the advantage of limited liability. This safeguards landlords’ personal finances from the financial risks associated with managing investment properties.
   
   
3. Enhanced Tax Benefits: Limited companies enjoy greater flexibility in utilizing various tax strategies compared to individuals. From benefiting from a lower dividend tax rate when extracting rental income to achieving tax savings during property disposals with a lower corporation tax rate instead of capital gains tax, companies can optimise rental income by minimising tax liabilities.
   
   
4. Share Division Flexibility: While individual property ownership is capped at four individuals, purchasing through a limited company allows for a more flexible division of ownership through shares. This proves advantageous for family businesses or situations where a greater number of investors are involved.

What tax benefits come with purchasing property through a limited company as opposed to buying as an individual?

While the advantages of buying property through a limited company may not apply universally to all landlords, for many, the tax benefits translate into substantial savings compared to acquiring investment property as an individual. The tax advantages associated with buying property through a limited company include:

• Deducting mortgage interest as an allowable expense: Limited companies can claim 100% of mortgage interest payments as a business expense, reducing profits before the application of corporation tax. In contrast, individuals can only claim 20% of mortgage interest payments as tax credits, with Section 24 not applying to limited companies.
  
  
• Lower taxation rates for retained profits: Limited companies are subject to corporation tax on profits, offering potential savings compared to income tax for individuals. The disparity becomes more significant for landlords in higher income tax bands, as the main corporation tax rate is 25% for profits exceeding £250,000, potentially resulting in considerable tax efficiency for those reinvesting profits.
  
  
• Flexibility in extracting rental profits: Limited company owners have the flexibility to choose between drawing a salary or dividends when extracting rental profits. While both options have advantages and drawbacks, combining them can lead to a more tax-efficient outcome. Individuals, on the other hand, lack such options and are simply taxed on rental income as income tax.
  
  
• Reduced tax burden upon property disposal: Individuals selling investment property are subject to capital gains tax, ranging from 18% to 28%. Limited companies, however, do not incur capital gains tax on property disposals. Such transactions are considered business activities, subject to corporation tax with a maximum rate of 25%. Business Property Relief for inheritance planning: Limited companies may qualify for Business Property Relief when leaving property as part of an inheritance. This relief allows for a 50% reduction in the value of land and properties owned by the company before calculating inheritance tax, provided the company’s activities extend beyond mere property investment, potentially offering significant inheritance tax savings.