When purchasing a buy-to-let property (a property you buy in order to rent it out to tenants) it’s important to think about how you will own the property and what tax you might have to pay. In recent years, landlords have increasingly chosen to purchase buy-to-let properties through limited companies. But what are the benefits of purchasing property through a limited company?
What is a property company?
When you buy property, you can buy them as an individual or a business (eg a company). Private limited companies are legal entities with which you can run your business. Setting up a company to manage your buy-to-let portfolio is known as ‘company incorporation’.
Landlords who manage (and own) property through a limited company will receive buy-to-let rental income differently than if they simply own the property as private individuals. This is because the property belongs to the company itself (which in turn is owned by the landlord). Where your property company owns the property, you can choose to:
- receive rental income as dividends (ie a payment made out of the company’s assets – such as profits – made to the company owners, known as ‘shareholders’); or
- pay yourself a salary from the company.
What are the benefits of setting up a property company?
While setting up a company involves additional administrative steps, which can be complicated and time-consuming, there are certain benefits to owning a limited company to rent out your properties.
Some of the benefits of incorporating a property company include:
- a limited company owning the property grants company owners (ie shareholders) greater protection through ‘limited liability’. The basis of a limited liability company is that all debts incurred by a company are the company’s liabilities and are not directly the legal liabilities of the company’s shareholders or directors.
- a limited company owning the property allows you to pay corporation tax, which is typically lower than individual income tax rates (which would be payable where the property is owned by private individuals).
- buy-to-let mortgage relief applying to limited companies (ie companies can claim mortgage interest as a business expense).
- transferring properties between companies (rather than individuals) may allow you to save money, as you may not need to pay stamp duty, inheritance tax, or capital gains tax.
Are there any downsides to setting up a property company?
While there are many benefits of setting up a company to own and manage property, there are certain downsides. These include:
- the existence of certain responsibilities for landlords who have set up a limited company to manage their property, including certain filings at Companies House, maintaining company books, filing accounts and tax returns.
- landlords having to pay income tax if they take profits out of the property company.
- it being more difficult for limited companies to obtain buy-to-let properties, than for private individuals.
It is also advisable for those who set up a property company to seek specialist advice from a broker or accountant. This may be costly and time-consuming.
How to set up a property company
If you set up a company, you will need to register it at Companies House. All limited companies must be registered at Companies House before they can begin trading, and are subject to rules for annual filings and paying taxes.
Before you can set up a company, you must choose a company name. This is different to a business name, and you will need to find a name that has not already been registered.
All companies must have a registered office address where notices, letters and reminders can be delivered. This doesn’t need to be an address where day-to-day business is carried out, so it could be your accountant’s address or a director’s address for example. Be aware that the registered office address will be available on the public record at Companies House.
You will then need to consider who you want to run the company. Private companies are required to have at least one director who must be an individual (as opposed to a company acting as a director). Directors must:
- be at least 16 years of age
- not have been previously disqualified from acting as a company director
- not be going through the process of bankruptcy
You will also need to decide how many shares you want to issue and at what value. A very simple way to form a company is to issue at registration one share at the value of £1, using the sole director as the shareholder. Additional shares can be issued at a later date.
Read more on how to register a company in 5 steps.
Registering your company
You must register your company with Companies House. You can do this online, by post or using an agent.
The registration fee payable will depend on the service you choose. Within three months of starting trading, your company needs to be registered for corporation tax, for most businesses this is done at the same time as registering with Companies House, failure to do so may result in a penalty.
After a company is registered, you will receive certain documents (ie a certificate of incorporation and a memorandum of association) and will need to comply with certain post-registration requirements.
Read Buy-to-let as an investment, Points to consider before you buy-to-let and Buy-to-let tax implications for more information. Ask a lawyer if you have any questions or require assistance setting up your property company.