What is a property company?
When you buy properties, you can buy them as an individual or a business (eg a company). Private limited companies are distinct legal entities via which you can run your business. Setting up a company to manage your buy-to-let portfolio is known as ‘company incorporation’.
If you buy property as an individual, you will pay income tax (or Scottish income tax) on any rental property earnings. If you purchase property as a company, you will pay corporation tax on the annual profits the company makes.
Landlords who manage (and own) property through limited companies will receive buy-to-let rental income differently than if they simply own 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 your property, you can choose to:
receive rental income as dividends (ie payments made out of the company’s assets – such as profits – 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 using 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 paid at lower rates than individual income tax rates (which would be payable where the property is owned by a private individual)
buy-to-let mortgage relief applies to limited companies (ie companies can claim mortgage interest as a business expense)
transferring (eg selling) properties between companies (rather than individuals) may allow you to save money, as you may not need to pay stamp duty (for properties in England), land transaction tax (for properties in Wales), land and buildings transaction tax (for properties in Scotland), 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 imposed on landlords who have set up a limited company to manage their property, including making certain filings at Companies House, maintaining company books, and 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 than for private individuals to obtain buy-to-let properties,
It is also advisable for those who set up property companies 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. They 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. However, it must (from 4 March 2024) be somewhere where any documents delivered to the company can have a recorded acknowledgement of delivery and be expected to come to the attention of somebody acting on behalf of the company. 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.
For more information, read How to register a company in 5 steps.
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.