BTL LTD Company vs Owning Buy-to-Let Properties Personally

When it comes to owning buy-to-let (BTL) properties in the UK, investors can choose to hold properties personally or through a limited company (LTD). Each approach has its advantages, and the best option depends on factors like tax implications, primary income, and long-term investment goals.

Personal Ownership of Buy-to-Let Properties

Owning BTL properties personally has traditionally been the most straightforward approach. Income generated from rental properties is added to your personal income and taxed according to your income tax band:

• Basic rate (20%): Income up to £50,270.
• Higher rate (40%): Income between £50,271 and £150,000.
• Additional rate (45%): Income above £150,000.

Disadvantages:

• Higher Tax Rates: For high-income earners, rental income pushes you into the higher tax brackets (40% or 45%), significantly reducing your net profit!
• Restricted Mortgage Interest Relief: Mortgage interest tax relief is capped at 20% for individual landlords, which can be a disadvantage for those in higher tax bands.

Owning Buy-to-Let Properties Through a LTD Company

Setting up a limited company for your BTL properties is becoming an increasingly popular option, especially among higher-rate taxpayers. Rental income earned by the company is subject to corporation tax instead of personal income tax. The corporation tax rate in the UK is currently 25%.

Advantages:

• Lower Tax Rates: Even with the upcoming increase in corporation tax, the rate is significantly lower than the higher and additional personal income tax rates.
• Full Mortgage Interest Deduction: Limited companies can deduct 100% of mortgage interest from rental income before paying tax, providing substantial savings.
• Tax-Efficient Profit Extraction: Owners can withdraw profits through dividends, which are taxed at a lower rate than personal income, or leave profits in the company for reinvestment.
• Limited Liability: Personal assets are protected in case of financial difficulties related to the property portfolio.

Disadvantages:

• Increased Administration: Running an LTD company involves additional responsibilities, such as preparing annual accounts, filing corporation tax returns, and complying with Companies House regulations.
• Setup Costs: There are costs associated with forming and maintaining a company, including accountancy fees.
• Higher Mortgage Rates: Buy-to-let mortgages for companies often have slightly higher interest rates and stricter lending criteria.

Tax Efficiency Based on Primary Income

For individuals with a high primary income, owning properties through a LTD company can be significantly more tax-efficient:

• Corporation Tax at 25%: By owning properties through an LTD company, you pay the much lower corporation tax rate on rental income. This is especially beneficial for those planning to reinvest profits rather than withdrawing them immediately.

Key Considerations

• Long-Term Goals: If you aim to build a large property portfolio, using an LTD company offers better scalability and tax efficiency.
• Inheritance Planning: Holding properties within an LTD structure can simplify inheritance tax planning and allow you to pass shares of the company rather than individual properties.
• Exit Strategy: Selling properties held personally may result in capital gains tax at up to 28%, while selling shares in an LTD company might incur different tax considerations.

Conclusion

Deciding between personal ownership and using a limited company for your buy-to-let properties depends on your income level, investment strategy, and financial goals. High-income earners, in particular, can benefit from the reduced tax rates and mortgage interest deductions available through an LTD structure. However, the added administrative responsibilities and costs must also be factored in. Consulting with a tax advisor or financial planner can help you determine the best approach for your circumstances.