13 min read
What is a buy-to-let property company?
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
2. Keep your home and buy-to-let company addresses separate
3. Decide on the share capital and structure
4. Sort out your owner loan agreement
- 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
- 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.