The benefits and disadvantages of buying buy-to-let through a limited company

In recent years, many investors are opting to purchase buy-to-let properties through limited companies. This is done strategically to provide the investors with some added advantages. However, consideration needs to be given to a broad range of factors, such as tax implications, financing options, and legal considerations. Let us look at some of the key benefits and disadvantages of this process.

Benefits

Tax Efficiency

If you own a property through a limited company, the taxation process of mortgage interest is optimized for you. Since Section 24 doesn’t apply here, landlords can offset the mortgage interest amount completely and reduce the profits of the company along with the taxable income. This can result in significant tax savings, allowing investors to retain a larger portion of their rental income.

Reduced Individual Taxable Income

If you are already in the higher tax-paying bracket, going the limited company route will be even more beneficial for you. By owning a property through a limited company, you will be reducing your individual tax burden due to rental income.

Inheritance Tax Planning

Limited companies can offer advantages in terms of inheritance tax planning. Shares in a limited company can be passed down to heirs without triggering the stamp duty land tax that would be applicable to the transfer of individual properties.

Financing Opportunities

Some investors find that financing BTL properties through a limited company is more accessible than obtaining mortgages as an individual. Many buy to let mortgage brokers in the UK also attest to this fact. This is because lenders may view limited companies as less risky entities, potentially offering better loan terms and conditions.

Asset Protection

Operating through a limited company provides a level of personal asset protection. In the event of financial difficulties or legal issues related to the BTL property, the personal assets of the shareholders are generally shielded from potential claims.

Disadvantages

Higher Initial Costs

Establishing and maintaining a limited company involves additional costs, including legal fees for incorporation, ongoing compliance costs, and potential accounting fees. These upfront expenses can impact the overall affordability of the investment.

Limited Mortgage Options

While financing opportunities exist for limited companies, the range of mortgage products available may be more limited compared to those for individual landlords. Interest rates for limited company mortgages may also be higher, impacting the overall cost of borrowing.

Increased Administrative Burden

Operating a limited company comes with increased administrative responsibilities, including filing annual financial statements, maintaining statutory records, and adhering to company law requirements. This burden may be difficult for individual investors not accustomed to corporate governance.

Less Flexibility in Withdrawing Profits

Unlike individual landlords who have more flexibility in withdrawing profits from their property investments, limited companies may have restrictions on how profits can be distributed to the shareholders. This lack of flexibility can be a disadvantage for investors who rely on their regular income generated by BTL properties.

Potential Capital Gains Tax Implications

When selling a property held within a limited company, capital gains tax may be applicable. The tax treatment of capital gains for limited companies can be less favorable than the capital gains tax allowances available for individuals.

The decision to purchase BTL properties through a limited company involves careful consideration of various factors. While the potential for tax savings and asset protection may be enticing for some investors, the higher initial costs and increased administrative burden may pose challenges. Consulting with a buy to let mortgage broker for limited companies can provide valuable insights. You can always reach out to us at Visionary Finance, who provide bespoke and specialist advice in this area, to get the solution which suits your needs.