nigel woollsey

Nigel Woollsey

Online Writer
Published: 15/11/2019

At a glance

  • Landlords who operate as a limited company are not affected by the buy-to-let (BTL) tax relief changes that started in 2017 and complete in 2020.
  • The market for BTL mortgages available specifically to limited companies has grown since 2017, providing more choice than there once was – but interest rates can be higher.
  • Setting up a buy-to-let limited company can be a complex undertaking, with many factors that could affect profitability. In all cases, you should take professional legal and financial advice before proceeding.

The tax changes that impacted the buy-to-let mortgage market in 2017 resulted in a number of landlords setting up limited companies to manage their buy-to-let portfolios.

How to set up as a buy-to-let limited company

  • Register as a limited company with Companies House. This process is also called incorporating. You can do this yourself online, or you may want to go through a solicitor or accountant. The standard fee for electronic registration is £12 and takes 24 hours to turnaround. The price rises to £40 for paper submissions and takes up to 10 days.

  • You'll need to provide a few basic details, such as your company name, address, the director, details of the company's shares/shareholders and what it does (this will require you to check your SIC code , or standard industrial classification of economic activities – see the above section dealing with SPVs).

  • Once you've officially set up your company, you'll need to register for corporation tax. Again, this needs to be done through Companies House – you can arrange this online using your 10-digit unique taxpayer reference (UTR), that will be sent to your company address within a few days of becoming incorporated.

  • You're required to register for corporation tax within three months of incorporating; you'll face a penalty for registering late. You'll need to tell HMRC your company's registration number, the date you started to do business (your company's first accounting period will start from this date), and the date your annual accounts are made up to.

Once that's sorted, it's official – you're a limited company for tax purposes and will now pay corporation tax on your company's profits . However, this means if you already have a portfolio, you'll need to start the process of transferring those over to your company. Our recommendation – take specific professional advice from the outset.

Why become a buy-to-let limited company?

Private landlords who operate as individuals have seen an increase in their tax bills due to the changes in buy-to-let tax relief and, as a result, there has been growth in the number of limited companies established for the purpose of managing a rental portfolio.

Which lenders offer BTL mortgages to limited companies?

At the time of writing (November 2019) there are around 2,600 buy-to-let mortgage products being offered by UK lenders. However, of those, a little over two-thirds (66.3%) of these buy-to-let mortgages are only available to individual landlords. The remaining third (33.7%) are buy-to-let mortgages for limited companies, and so are available to SPVs, limited companies and/or offshore limited companies.

Buy-to-let tax relief changes

Prior to April 2017, landlords could deduct their entire mortgage interest costs as expenses against the rental income they earned. They would then pay tax at their personal tax rate on the remaining profits. The Government has been reducing this tax relief in 25% increments since 2017, and in the 2019/20 tax year landlords can only offset 25% of their mortgage interest cost as expenses. The Government also introduced a 20% tax credit against the proportion of the mortgage interest which is not tax deductible.

For example, in 2016, before the new rules, a landlord who earned £1,500 in rental income and paid £750 on a buy-to-let interest-only mortgage would only have to pay tax on the remaining £750 of their income:

£1,500 - £750 = £750 liable for tax.

In tax year 2019/20, using the same example, the landlord could only deduct £187.50 of their mortgage interest and would qualify for 20% tax credit on 75% of the mortgage interest:

£750 x 25% = £187.50 qualifying as a deduction from rental income
£750 x 75% = £562.50 x 20% = £112.50 tax credit
£1,500 - £187.50 = £1,312.50
£1,312.50 - £112.50 = £1,200 liable for tax.

The table below shows, for each tax year, the proportion of mortgage interest that qualifies for deductions and for the new tax credits:

Tax year

% of mortgage interest tax relief (as an expense deduction)

% of mortgage interest attracting the new 20% tax credit

April 2017

75%

25%

April 2018

50%

50%

April 2019

25%

75%

April 2020

0%

100%

Higher-rate taxpayers see the greatest increases, as the tax credit only provides a refund of 20% and not at the higher or additional rates of tax as per the system before 2017. Another consequence of the changes is that landlords now need to declare a greater level of income (their profit from their rental properties) and this could see some move into a higher income tax bracket.

Are there are any disadvantages of using a limited company for a buy-to-let portfolio?

Landlords who use a limited company could pay out more than they will immediately gain. This is due to:

  • Buy-to-let mortgages for limited companies typically charging higher interest rates than those for individual landlords.
  • Transferring a landlord’s property from an individual’s (or couples’) name to that of the business makes them liable for stamp duty of:

Purchase price of property

Stamp duty rate for BTL (% of the property value)

£0 - £125,000

3%

£125,001 to £250,000

5%

£250,001 to £925,000

8%

£925,001 to £1.5 million

13%

Over £1.5 million

15%

 

Special purpose vehicles and their role in buy-to-let limited companies

Special purpose vehicles (SPVs) – also sometimes called special purpose entities (SPEs) or bankruptcy remote entities (BRE) – are a popular choice due to their simplicity and the fact that they exist solely for the purpose of buying, letting and selling of property. In addition, mortgage lenders find this type of company much easier to underwrite than other trading limited companies. Consequently, there are more mortgage options available for SPVs and interest rates tend to be better. While there are lenders who will underwrite trading limited companies, they typically will only consider those on a strong financial footing with at least two or three years’ accounts as a minimum.

It should be noted that some lenders will only consider mortgage applications from SPVs.

Mortgage lenders will not accept SPVs with more than four directors. In addition, each director will have to provide full personal guarantees that they will repay the loan if the SPV folds.

When the SPV is being incorporated with Companies House as a new limited company, it will be necessary to specify which of the UK’s standard industry classification codes (or SIC codes) best describes its purpose. Typically those used are:

  • 68100 – Buying and selling of own real estate
  • 62809 – Other letting and operating of own or leased real estate
  • 68320 – Management of real estate
  • 68201 – Renting and operating of housing association real estate.

Can a limited company get a buy-to-let mortgage?

Yes, this is perfectly possible although you may have to look further afield than the usual high street lenders in order to get the mortgage you want. Traditional banks and building societies much prefer to concentrate on the more straightforward mortgage market, so it will probably pay you to engage the services of a mortgage broker, who has a much wider and deeper view of the market, including specialist and niche products.

Also bear in mind that, if you have an existing buy-to-let mortgage on the property, issues could arise when it comes to changing it from an individual to a company arrangement. The lender may be happy to switch the mortgage over to the company name when the property is transferred, but on the other hand, they may not, in that case a remortgage would be required with all the costs associated. Make sure you seek advice and speak to your lender before you take the plunge to make sure you're prepared.

How can I find the right buy-to-let mortgage for limited companies?

Once you've gone through the process of incorporating, you'll also find that your mortgage options change. You'll need to find an even more specialist product as not all BTL mortgages are available to limited companies, but happily, choice in the marketplace has grown, as lenders respond to rising demand.

This means it should be far easier for newly incorporated landlords to find the best buy-to-let mortgage deals available to suit their circumstances – check out our top rate charts to get started and make sure to seek suitable advice , and see if you can benefit from becoming a limited company.

I’m thinking of becoming a landlord, where can I find some basic info on this?

For aspiring landlords who are thinking of taking their first steps into the buy-to-let market, you can also read our Five steps to becoming a buy-to-let landlord guide. New landlords might also find our guide to Landlords’ rights and considerations helpful.

Pros and cons of setting up a buy to let limited company

  • Landlords who have incorporated as a limited company are not affected by the tax changes introduced for individual landlords in 2017 – especially higher and additional rate taxpayers.
  • Limited companies are treated as a separate legal entity, thus ring-fencing your personal liability for financial dealings.
  • Choice of buy-to-let mortgage products is more restricted and you may also pay higher interest rates.
  • You will still have to pay corporation tax on your limited company’s trading profits (currently 19%).
  • Landlords who incorporate as a buy-to-let limited company will have to pay stamp duty on the properties they currently own when these are sold or transferred to the company.
  • Accounts for your business becomes more complicated.

Moneyfacts tip:

Moneyfacts tip nigel woollsey

Administration and accounts become more complex and time-consuming once you have made the change from an individual landlord to a portfolio owned by a limited company. In many instances, you may find that it’s a good idea to look into using the services of a qualified accountant

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

hand shake in business meeting

At a glance

  • Landlords who operate as a limited company are not affected by the buy-to-let (BTL) tax relief changes that started in 2017 and complete in 2020.
  • The market for BTL mortgages available specifically to limited companies has grown since 2017, providing more choice than there once was – but interest rates can be higher.
  • Setting up a buy-to-let limited company can be a complex undertaking, with many factors that could affect profitability. In all cases, you should take professional legal and financial advice before proceeding.

Guide contents

Cookies

Moneyfacts.co.uk will, like most other websites, place cookies onto your device. This includes tracking cookies.

I accept. Read our Cookie Policy