Some expert advice on how to be tax efficient with buy to let properties

Letting agency, Hamptons has released data highlighting the number of limited companies set up to hold buy-to-let properties reached record highs in 2023, with 50,004 limited buy-to-let companies set up in the UK last year.

James Mole, Director of property funding and insurance firm J3 Advisory has given us his expert insight into what this could mean for those who are investing in buy-to-let properties, and what is driving this change in the market.

He says: “Landlords have two options when it comes to investing in buy-to-let properties. They can either be bought by an individual or individuals or alternatively they can be bought through a limited company.

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“For landlords investing in a portfolio of properties, i.e. a reasonable number, the key benefit is that buying to let through a limited company and paying corporation tax can work out more tax efficient than paying income tax as an individual.

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Buy to let tax advice

“In terms of the surge in landlords setting up limited companies over the last year, this trend is being largely driven by economic factors and the increases to mortgage rates.

"This is because as mortgage rates rose throughout 2023, so did the number of limited companies being registered by landlords. That is because for higher taxpayers, limited companies provide better tax relief options.

“Tax credits have also had a significant impact on the market and to landlords approach to property investment.

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"As of April 2020, when calculating their taxable profit, landlords can no longer deduct any of their mortgage interest from their total rental income.

“A significant benefit to those setting up a limited company for property investment is that these restrictions on buy-to-let mortgage tax relief do not apply to limited companies.

"This means that landlords would be taxed 19 per cent on these profits through a limited company, rather than 40-45 per cent in income tax if they were registered as an individual purchaser.

“Another key benefit is that limited companies enable property investors to grow portfolios at a faster rate, due to the fact that profits can be retained through the company for future investments without having to pay income tax on these funds.

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“Therefore, from a financial security perspective, investing through a limited company legally separates your investment from your personal finances, meaning you are not personally liable.

“However, it is very important to be wary of the potential drawbacks of using this approach to invest in your property portfolio.

"If you sell a property in the future and it is within a limited company, it means that you will be required to pay capital gains tax on the property. It is also worthwhile to be mindful of the fact that many buy-to-let mortgages carry higher interest rates and fees for limited companies than they do for individual mortgages so that is something to factor into your calculations.

“Investing in property through a limited company will also require much more rigorous administrative and legal responsibilities. These include the maintaining of company and financial records.

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“For many investors, this is where they often require professional advice and expertise from third-party professionals.”

*Always do your due diligence when contemplating buying a property or properties and if you are unsure about how best to pay the tax on the investment to seek advice from a tax expert.