Home Investment Buy-to-Let Investment: Should you move your property investments into a limited company?

Buy-to-Let Investment: Should you move your property investments into a limited company?

Over recent years, the residential buy-to-let market has seen a number of significant changes. These include regulatory changes (such as the “right-to-rent” scheme and the extension of HMO licensing), changes to the mortgage market (such as the introduction of affordability criteria for landlords) and changes to the tax landscape (such as the removal of mortgage tax relief).

While there is still the prospect of good returns in this area, achieving these returns (while staying on the right side of the law) means that the residential buy-to-let market is becoming increasingly professionalised, which in turn means that putting property investments within the vehicle of a limited company may be an appropriate course of action for a growing number of landlords. If you are thinking about this option, here is a brief summary of what you need to know.

Forming a limited company is a major step with long-term implications

It should be clearly understood up front, that forming a limited company requires an up-front investment of both time and money. It should also be clearly understood that, at this time, limited companies may find it more of a challenge to secure mortgages, precisely because of their limited structure. This may change in future, presumably if it becomes standard, or at least commonplace, for property investors to work through limited companies, then lenders will have to adapt to this to stay in business themselves.

Transferring property into a limited company needs to be done with care

While the use of limited companies has been described as the “landlord loophole” it needs to be done with care in order to stay on the right side of HMRC. It is highly unlikely that you will be able to transfer existing properties into a limited company in the same way as spouses can make transfers of assets to each other. Instead, the limited company will probably have to buy the property from the existing owner, which means that all relevant charges will apply (e.g. capital gains tax and stamp duty). This is not necessarily all bad news, since there are strategies which can be used to limit the impact of these charges (for example having the company make payment via the channel of a director’s loan), but these factors do need to be taken into consideration.

Profits belong to the company unless they are paid out as taxable dividends

The fact that limited companies can not only claim mortgage expenses as taxable deductions but also pay corporation tax (currently at 19%) rather than income tax can make it much easier for landlords to make a profit out of their investments. The flip side of this, however, is that these profits belong to the company unless they are paid out to directors/shareholders in the form of dividends, which can be taxed at as much as 32.5%. This, however, is still less than the higher rate of income tax. It should also be noted that there is currently no legal requirement for limited companies to pay dividends so investors could potentially hold off taking dividend income until their retirement.

Hopwood House are one of the fastest growing property investment companies in the UK, with a wide range of investment opportunities in the buy-to-let, hotel room and student property investment markets.

Elliot Preece