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Should I Set Up a Limited Company for Buy To Let Properties?

There is not a straightforward answer to this question. It depends on personal circumstances, future intentions and the availability of mortgage finance. You should also be mindful that a Limited Company is required to file accounts of the financial status of the entire portfolio with Companies House on an annual basis.

Transferring existing properties from an individual to a Limited Buy To LetCompany is more complex than purchasing a new property within as Capital Gains Tax would be liable, along with Stamp Duty Land Tax.

The Limited Company needs to be set up correctly by the accountant as lenders will require that the Limited Company is a Special Purchase Vehicle (SPV). This means that all of the companies revenue comes from rental income from residential investment property. The Limited Company must also have the correct SIC (Standard Industrial Classification) codes at Companies House, which describes the nature of the business.

Advantages

Higher Tax Relief- From 2017 to 2020 the amount of Buy To Let tax relief for individual landlords will be progressively cut for top rate tax payers, however, this does not affect Limited Companies. Therefore if you are a top rate tax payer, the tax payable by a Limited Company will be lower than on individual income.

No Tax on Dividends Below £5,000- Until April 2017 the Dividend Tax Credit has been replaced by a tax-free Dividend Allowance of £5,000. This means you could potentially receive tax-free dividend income from your properties.

No Income Tax When Reinvesting Profits on Further Properties- There is no income tax on the retained profit of a company, thus allowing more cash to re-invest. Although corporation tax is payable on trading profits, this is lower that the higher income tax rate.

Personal Funds Can Be Drawn Out of The Company- Any advances made to the Limited Company can be drawn back out as a Directors Loan.

Disadvantages

No CGT Allowance When the Property is Sold- Whereas individuals selling their property would have a £11,100 Capital Gains Tax allowance (2016/2017).

Running Costs of a Limited Company- costs include preparation of accounts company tax and corporation tax, filing at Companies House, legal fees and annual auditing. Accountants may also charge higher fees for a Limited Company.

Higher Mortgage Rates- Most lenders charge higher interest rates and fees for Limited Companies compared to individuals.

Reduced Choice of Mortgage Lenders- Many lenders do not offer mortgages to Limited Companies, and if they do the product range is often smaller.