Limited company vs. personal name
Done properly, investing through a limited company can be far more tax-efficient than buying to let in your own name. Here’s a few reasons why:
When you invest through a limited company, you can deduct your mortgage interest payments from your rental profits – pre-tax. That means you’ll pay less corporation tax, as your profits will be lower. Here’s a quick example:
Say your rental income is £1,000, and your mortgage interest payments are £150. You can deduct the £150 from the £1,000, and only pay tax on the £850 that’s left. Plus, you’ll only pay Corporation Tax on that – a mere 19% on a portion of your profits, in many cases up to £50,000.
If you invested in your own name, on the other hand, you’d pay up to 45% in Income Tax on all your profits – with only a 20% tax credit on your interest payments. If you’re on the Higher tax band, here’s what that would save you:
Invest in your own name
Invest through a limited company
Profit (rental income)
£12,000
Mortgage interest deducted
-£360 (20% tax credit on mortgage interest)
-£1,800 (£150x12)
Total taxable profit
£11,640
£10,200
Tax rate
40% (higher Income Tax band)
19% (Corporation Tax)
Total tax paid (1yr)
£4,656
£1,938
That’s an extra £2,718* you’ll save over the course of a year –all because you invested through a company, and paid Corporation Tax rather than Income Tax.
*This would be higher if those profits were taken as pension contributions. More on this in a second.
An investment is only any good when you can realise it. That is, you’re able to easily extract your profits. And that’s the great thing about investing through a limited company – it gives you the flexibility to access your earnings in a way that suits you – all tax-efficiently.
Here are three ways you can take profits out of your BTL business, all while saving on tax:
DividendsFor UK taxpayers, there’s a £1,000 tax-free allowance on dividends – per shareholder, per year.
Owner/Director loan repaymentsWhen you invest in buy-to-let through a company, you loan your business that money. So it can pay you back from its profits, without triggering an Income Tax liability. Most investors take their tax-free
dividend first, before extracting the rest of their profits as loan repayments.
PensionsIf you contribute to a pension through your limited company, it’s considered a business expense. That makes it deductible from your profits – much like your mortgage interest payments. This reduces the amount of Corporation Tax you’ll pay overall.All of this is only possible when you invest through a limited company.
If you invest through a company, you won’t be selling a property when you sell. You have the option to sell shares in the company that owns that property.
And, when you sell shares as a UK taxpayer, you pay Capital Gains Tax at 10 or 20% on
the increase in their value since you owned them (depending on your Income Tax band). If you bought in your own name initially, you’d pay up to 28% on any increase in value when you came to sell.Plus, when your buyer purchases the shares in your company, they’ll only pay 0.5% in Stamp Duty on the value of the shares – rather than SDLT on the whole value of the property. This could save them thousands, giving you a price advantage: because they won’t pay such a large Stamp Duty bill, you can afford to bump up your asking price – effectively splitting the difference. You’ll earn more, and they’ll pay less. Win-win.
Your beneficiaries also benefit from a limited company structure. You could gift 99% of company shares to a beneficiary. Provided you do this seven years before passing away, they’ll inherit the remaining 1% and only pay Inheritance Tax on the 1%.