Limited company buy-to-let has become increasingly popular since mortgage interest tax relief changes. But is it right for your situation? Here's an honest analysis.
The decision to purchase rental properties through a limited company rather than in personal name is one of the most significant financial decisions a buy-to-let investor can make. It involves tax, mortgage, legal and practical considerations that interact in complex ways.
Why limited companies have become more popular
The catalyst for the shift towards company structures was the gradual removal of mortgage interest tax relief for individual landlords from 2017-2020. Individual landlords can no longer deduct mortgage interest from rental profits before calculating income tax liability — instead receiving a basic rate tax credit. For higher rate taxpayers, this significantly increases their effective tax rate on rental income.
Companies, however, pay Corporation Tax on profits (currently 25% for profits over £250,000) and can deduct mortgage interest as a business expense. For higher rate taxpayers with significant mortgage debt, company structures often produce substantially lower overall tax bills.
The complexities of company buy-to-let
The tax advantages don't come for free. Limited company mortgages typically have higher interest rates than personal mortgages — often 1-2% higher — and many lenders have more restrictive lending criteria for companies. There is also increased administrative burden: company accounts, Corporation Tax returns and annual Companies House filings all add costs.
Extracting profits from the company — through salary, dividends or director's loans — creates additional tax events that need to be factored into the overall picture.
When does it make sense?
Company structures generally make sense for: higher rate taxpayers with significant mortgage debt (where the tax saving on interest deductibility outweighs higher mortgage costs); landlords building a portfolio who intend to retain profits within the company for reinvestment; and those who don't need to extract all rental income immediately.
Seeking specialist advice
This is not a decision to make without specialist advice. A property accountant who works extensively with landlords can model the precise figures for your situation, including existing properties, debt levels and income. The cost of this advice is typically an allowable expense.