13 min read
Running a rental business is a great way to make steady money if you have property in your name or are willing to make the investment upfront. Choosing the right structure for it, however, is crucial. Many landlords opt for the limited company setup, but is that the only way?
Can you run a buy-to-let business without it being a company? What are the benefits of the company structure over other options? In this blog post, we cover all the major points related to the buy-to-let company setup so that you can make an informed decision about which way to go. But first, let us get the basics out of the way:
What is a buy-to-let property company?
The buy-to-let company set up process is fairly simple, and you can do it yourself by registering with Companies House.
Steps for ensuring a buy-to-let company setup
As you can imagine, completing the year-end close is a laborious process. Even the most organised and experienced finance and accounts teams can get bogged down by everything that has to be completed. Cloud accounting and the various softwares available make this process a lot easier but if you are not yet in that brave new world, here are some of the most common challenges you may face:
- First, choose a unique trading name.
- Then, select a company address to register – this could be your home, your accountant’s office, or your official place of work.
- Include the names of the company directors and shareholders. Bear in mind that this could be just one person – yourself.
- Choose the appropriate business category for your buy-to-let company. Your options are:
- 68100 – if you buy and sell properties
- 68209 – if you let or operate leased properties
- 68320 – if you manage property
- 68201 – if you are involved in property renting or running housing association properties
- Have a Memorandum of Association (MoA) and Articles of Association (AoA). There are default options that you can use if you do not want to draw up your own.
- Register with Companies House by submitting these documents and paying the £12 fee.
- Finally, set up a business bank account and register with HMRC to pay Corporation Tax.
Key considerations in a buy-to-let company setup
Here is what to keep in mind when running a buy-to-let through the limited company format:
1. Use the Special Purpose Vehicle (SPV) for a buy-to-let mortgage
The SPV structure has an advantage when it comes to getting a buy-to-let mortgage for a limited company. This is because an SPV is exclusively for owning, buying, and letting properties, and thus its cash flows can always be directly linked to the assets owned by the SPV.
This makes it easier for the lending company to know where the money is coming from and thus assess your creditworthiness.
2. Keep your home and buy-to-let company addresses separate
While you are legally allowed to register your home address for a buy-to-let company setup, it is not advisable simply for privacy reasons. If you use your home address, this means that anyone searching for your company, including tenants, can easily find out where you live.
This could be particularly problematic if disputes or disagreements arise and lead to security concerns or unwanted visitors at your doorstep. Your home is also your sanctuary; it is where you go to escape from the stresses of work.
There is also the issue of maintaining a professional image. A residential address might not instil the same level of confidence in potential tenants, business partners, or investors as a commercial address would. It could suggest that the business is not established or significant enough to have its own dedicated business premises.
Registering your home address as your business address means you may receive a higher volume of junk mail. Businesses often get targeted by marketers and you may find a significant increase in unwanted mail.
Additionally, there is the risk of unsolicited visits from clients or salespeople, which could be inconvenient and intrusive. Fret not – there are several accountants who can provide you with the services of a registered company address. You can always count on Golding Accountancy.
3. Decide on the share capital and structure
You will need to decide how much share capital you will be issuing. This could be a nominal amount (as little as one pound) or a bigger amount, depending on your company’s needs.
You will also need to decide on your share structure, bearing in mind that lenders are more likely to grant your buy-to-let company mortgage if you have a simple share structure.
4. Sort out your owner loan agreement
You will need an owner loan agreement if you are lending money to the buy-to-let company setup for the initial financing and any associated legal expenses. The company starts repaying the loan as soon as it earns money from its rental properties.
Ideally, you should keep the loan interest-free, as this will boost the value of the company shares, and if you dispose of them you will pay Capital Gains Tax (CGT) which is lower than income tax. The conditions of the written agreement should include:
- Purpose of the loan, and how much is being lent
- Interest rate, which should be reasonable for both lender and borrower (although as we mentioned, we recommend keeping it interest-free)
- Repayment schedule, taking into account the expected cash flow from the rental property and any other income sources
- The security being provided for the loan, such as a personal guarantee from the borrower or a charge on the rental property
5. Do not forget about the shareholder’s agreement
Another important document for a buy-to-let company setup is the shareholders’ agreement, which will clearly lay out the rights and obligations of the shareholders. It should include:
- Share ownership and voting rights
- Details of how dividend will be paid
- How decisions will be made and how disputes will be resolved
- Rules around share transfers
- Restrictions on who is allowed to own shares
- Exit strategy for shareholders, including rights of first refusal
Buy-to-let tax changes that landlords need to know now
Here is what you should know if you are planning for a buy-to-let company setup:
- The individual personal allowance is £12,750. Landlords will have to pay 20% tax on rental income between £12,751 and £50,270, beyond which they will have to pay 40% up until £125,000, beyond which the additional tax rate of 45% will kick in.
- The Capital Gains Tax allowance has been reduced from £12,300 to £6,000. This will further come down to £3,000 in April 2024. What this means is that landlords will have to pay higher CGT when they sell their properties.
- The Making Tax Digital (MTD) scheme implementation has been delayed. This means that landlords earning more than £50000 a year need to submit returns via MTD-compatible software from April 6, 2026. This has been pushed to April 6, 2027 for those earning between £30,000 and £50,000, while there is no clear deadline yet for those earning under £30,000.
- The Corporation Tax (CT) rate for limited companies with profits of over £250,000 has gone up from 19% to 25%. For landlords earning profit between £50,001 and £250,000, they have to pay 25% reduced by a marginal relief, which will depend on exactly how much they are earning. The 19% Corporation Tax rate will continue to hold for a buy-to-let company setup with profit below £50000.
- A stamp duty cut was introduced in the September 2022 budget, which means that landlords will have to pay a flat rate of 3% on all their property purchases up to £250,000. However, the stamp duty rates will return to normal by March 2025.
Pros and cons of incorporating a buy-to-let property business
In the last decade, many more UK landlords are opting to set up buy-to-let through limited companies. This is largely owing to the tax benefits involved. However, it makes sense to understand both the pros and cons before investing in a structure.
Here is what you need to keep in mind:
Pros of buy-to-let company setup
1. Lower tax rates
The main reason UK landlords opt to run their buy-to-let through the limited company structure is that Corporation Tax rates are lower than individual income tax rates.
Corporation Tax is a maximum of 25% for companies making over £250,000 in profit, and less for those making lower profits. Depending on the income band you fall into, individual income tax could be as high as 45%.
2. Restrictions on mortgage interest relief do not apply
Following a 2015 announcement by then-chancellor George Osborne, individual landlords are no longer allowed to offset their mortgage interest costs against their tax bills. For a buy-to-let mortgage for limited companies, however, this restriction does not apply.
3. Limited liability
As a separate legal entity, the company’s debts are not your debts. This offers you a lot of legal protection as the landlord.
4. More options for tax planning
As a limited company owner, you can draw income in a tax-efficient manner as and when you require it. For instance, if you and your spouse jointly hold a buy-to-let company setup, you can pay yourselves dividends and thus maximise your tax-free income thresholds.
Cons of buy-to-let company setup
1. Personal tax on money drawn from the company
If you want to use the money you are earning from your buy-to-let company setup, you will need to draw it out, and it can then be subject to personal income tax. So you may find yourself in a situation where you are paying both Corporation Tax and income tax.
2. Low CGT allowance
As we mentioned above, the Capital Gains Tax allowance for limited companies has been greatly reduced. Individuals have a much higher CGT allowance on profits when they dispose of property.
3. Expensive to transfer property to a limited company
If you are transferring a property that you own in your name to your buy-to-let company setup, you will likely have to pay a variety of fees including legal fees, stamp duty and Capital Gains Tax.
4. Various administrative duties and costs
Running a buy-to-let company setup comes with all the hassle of any limited company structure. There are several formalities you will have to follow when it comes to reporting and accounting, and you will either have to pay an expert like Golding to handle it or take on the trouble of doing it yourself.
Final words
We hope this blog post gives you a better understanding of how to run a buy-to-let through a limited company. Remember that you still have to go through the company setup process with both Companies House and HMRC, and that running a company comes with its own responsibilities.
That is why we always recommend working with a professional tax accountant – they can advise you optimally on the pluses and minuses of the buy-to-let company setup and help you make the long-term rental profits you deserve.
For instance, our buy-to-let accountants can provide comprehensive guidance on the most tax-efficient ways to manage your property investments. They are well-versed in current tax laws and regulations, including allowable deductions, CGT implications, and the proper way to structure a buy-to-let portfolio.
Their expertise can prove invaluable in maximising your returns and ensuring compliance with the complexities of property tax legislation. Moreover, we can assist in the strategic planning of property acquisitions and disposals, optimising the timing and method of each transaction to keep the tax liability to a minimum.
In addition to tax planning and strategic advice, we can take on preparing and filing annual accounts, conducting financial health checks on your property portfolio, and providing regular updates on legislative changes that may affect your investments.
Our goal is to save you time and give you peace of mind that the financial aspects of your property investments are being handled professionally and efficiently. So what are you waiting for? Fill out this short contact form and share with us how we can help. Looking forward to catching up soon. Good luck!
Ian Butler
Director
Ian Butler is the Director of Golding Accountancy and has over 12 years of experience working in large accountancy practices. He founded the firm with a strong focus on providing personal, practical support to business owners. Ian specialises in helping clients understand their finances and improve profitability through straightforward advice. Outside of work, he enjoys BBQs and sci-fi films. Ian recommends tools like GoCardless and Stripe to help businesses get paid more efficiently.
