Should I let out my rental property personally or set up a limited company?

With the cost-of-living crisis affecting nearly everyone across the UK, more people are reviewing their current position and considering what options are available to them moving forwards. For individuals who own additional properties, a common question asked is whether it would be beneficial to set up a separate limited company to own and manage the property. This blog looks to evaluate the benefits of either choice, which hopefully will help make your decision clearer.

It is worth noting that I will be looking at this situation from a position of the property not being purchased yet. If the property is already owned personally, the transfer of this to a limited company would be treated in the same way as a property sale and would potentially be liable to capital gains tax for the individual as a seller and stamp duty for the limited company as a buyer.

Benefits of owning a buy to let property in the name of a limited company

• Any profits generated by the property will be liable to corporation tax and payable by the limited company. At the time of writing this blog, the rate of corporation tax is fixed at 19% and this will remain the same for companies generating a profit of less than £50,000 per year from 1 April 2023. This is lower than the basic rate of income tax, which is 20%, and becomes more beneficial the greater your other personal income becomes, which may be taxed at 40% or 45%.

• It should however be noted that the £50,000 threshold for the 19% tax rate is shared by all companies under common control, so if you have another limited company (for instance if you trade through a company), that threshold will be reduced to £25,000 for each company.

• From a personal tax planning perspective, there is more freedom when the rental profits are generated by a limited company, as you will only be taxed personally once any dividends are voted by the company. If you have multiple sources of income, it can prove beneficial to draw funds at a time which is most tax beneficial, rather than having to pay a higher rate of tax in years when your personal income is high.

• Mortgage interest is deductible in full, from rental profits in a limited company, whereas these are restricted to 20% for individual property owners, which is particularly inefficient for higher or additional rate taxpayers.

• On the sale of the property, any gains are taxed under corporation tax rather than capital gains tax. The maximum this can be from 1 April 2023 is at the higher rate of corporation tax being 25%, which is still lower than the higher rate of capital gains tax (after the annual exemption) of 28%. You should however note that if you wanted to obtain the proceeds personally then the payment from the company would be subject to personal tax which would push the overall tax rate well over 28%.

• It is possible to spread the ownership of shares in the company between family members so that dividends can be paid to a number of individuals, with the potential to use their income tax allowances and tax bands.

• The property is owned by the company itself and so ownership will be separate from you as an individual. This means that the value of the property would be protected from your creditors in the event of you becoming personally insolvent, and also protect you personally if the company became insolvent for any reason.

Possible issues of owning a buy to let property in the name of a limited company:

• As the income generated from the property will be in the name of the limited company you do not have instant usage of these funds. To have access to this money, you will need to draw this income as dividends which has personal tax implications for you.

• Companies are liable to an additional 3% surcharge in stamp duty and will be taxed at the higher rate of stamp duty as published by HMRC.

• If the value of a UK residential property owned by a limited company is more than £500,000, then the company will need to submit an Annual Tax on Enveloped Dwellings Return annually to declare this, although no tax will be payable if the property is let commercially to a third party. This will incur additional professional fees to prepare and submit this return.

• Limited companies do not receive a personal allowance for income tax or an annual exemption for capital gains tax and so basic rate taxpayers may actually end up paying more tax on rental profits in a limited company, as well as incurring additional tax when drawing the funds from the limited company.

• Limited companies are required to complete annual statutory accounts and a corporation tax return which requires more work from the directors of the company and will come at an additional cost in accountancy fees.

Benefits of owning a buy to let property personally

• UK taxpayers earning less than £100,000 per year are entitled to a full personal allowance and so will potentially have less of their rental profits chargeable to income tax. On the sale of the rental property, individuals will also receive an annual exemption each year which can be used to reduce or eradicate the final capital gains tax liability.

• Rental profits are reported and taxed through an individual’s self-assessment tax return meaning that there is no need for additional statutory work or accountancy fees.

• Income generated from the property is owned by the individual, meaning that these funds are readily available to use without the need for payment of dividends.

• There is the option to purchase properties under joint ownership, which can be particularly enticing to couples with a shared household income. In instances where a property is owned by married couples (or those in a civil partnership), any profits generated will be allocated and taxed based on the percentage of ownership of each individual on submission of a form to HMRC, allowing the utilisation of both individuals’ personal allowance and annual exemption when the property is sold. If the joint owners are not married (nor in a civil partnership), they can split the income as they wish, as long as they document this in advance.

Possible issues of owning a buy to let property personally

• For higher rate (especially those exceeding £100,000 of personal income) and additional rate taxpayers, the high-income tax chargeable on the rental profit can reduce the financial viability of owning the rental property.

• Rental profits are taxable personally in the tax year when the profit is generated, meaning that there is less scope for tax planning and controlling income streams.

• Mortgage interest is restricted to 20% tax relief, meaning that higher and additional rate taxpayers do not get full relief on their finance costs against their rental profits.

• There is no limited liability between the owner and the rental business, meaning that if one of the rental properties causes financial hardship then none of the individual’s personal assets are protected, and the property could be exposed to the individual’s creditors in the event of personal insolvency.

The biggest piece of advice that I would give when making this decision is to speak to your accountant and talk through the options available and the tax implications of each, taking into account your own financial and personal wealth situation.

Author: Sam Baldwin, Business Services Manager, Plus Accounting

Contact Sam

Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site

Date published: 16 November 2022

See how we can help you...

We believe in being involved with the local business community and that is why we network extensively, host regular business seminars, write blogs and have many trusted, professional contacts