Will Purchasing a Buy-to-Let Via A Limited Company Make You Pay Less Tax?

Professional Tax Consultant

Hey, are you thinking of investing in a buy-to-let property? It’s a great decision, undoubtedly, since it’s a safer bet and a better hedge against inflation down the road. No wonder more and more property owners are embracing this idea! However, we recommend connecting with a professional tax consultant nearby if you are on the same page. 

But, are you unsure whether to buy this property under your name or a limited company? Let us tell you in brief and resolve your doubts!

Understanding the Facts About Buy-to-Let Via A Limited Company and Tax Payment

Speaking of buy-to-lets, it really helps with funding your retirement. But, with any profit you earn, you have to pay the corporation tax and income tax on your income. It means you will earn a rental income from your buy-to-let, and when you pass this property to your children, they have to pay a massive inheritance tax bill. On the contrary, you are a higher-rate taxpayer if you earn around £60,000 a year.

Now, it’s not just you looking to cut the tax amount, everyone does. That’s why many appreciate holding buy-to-let properties via a limited company to offset the mortgage interest (if having a home with a mortgage) for tax payment. But, when your concern is whether it will benefit you somehow by paying less tax or you have to pay double while purchasing a buy-to-let property via a limited company as you are holding a business, let us tell you that you are not alone with this vexed question!  

More and more buy-to-let investors are purchasing the property via limited companies instead of under their names as it comes with different tax advantages. For instance, corporation tax becomes lower than income tax, such as while your company is making more than £250,000 profit, you have to pay 25% tax, while you will pay 19% tax with a profit of £50,000 or less. Moreover, you get marginal relief when your profit amount remains somewhere between £50,000 and £250,000.

Also, there are other benefits you can enjoy by investing in a buy-to-let property via a limited company rather than under your name. Such as:

Fully Offset Mortgage Interest-

When looking to invest in a buy-to-let property, owning it via setting up a limited company can benefit you by offsetting your mortgage interest against your rental income from it before the tax payment. Let us tell you how.

See, when you own a buy-to-let property under your name, you get tax relief only based on 20% of your mortgage interest payment. For example, if you are a higher-rate taxpayer with mortgage interest of £500 a month on the property rented out for £1000 per month, you will have to pay a complete tax of £1,000 with 20% relief on £500 for the mortgage interest.

But, when you buy the same buy-to-let property under a limited company, you will pay tax only on £500 of the income. Put simply, owning the property via a limited company will make you pay tax purely on profit, not on turnover like individuals!

Benefit From Company Structure-

Recent research shows that the mortgage interest is almost equal to their main costs. And, since the interest rates have risen, the rise of corporate ownership has increased as well and more and more investors are purchasing buy-to-lets by setting up limited companies. According to the latest research, around 74% of new buy-to-let property purchases have occurred in England. 

However, the advantages of owning buy-to-let properties depend on the individual circumstances of a landlord. For example, if you are a lower-rate taxpayer with a smaller amount of mortgage, purchasing buy-to-lets under your personal name is a better option.

Less Tax Payment-

Many investors find owning buy-to-lets by setting up a limited company concerning that they will be double taxed. But, that’s not true! Instead, the total corporation and dividend tax will be less than the income tax that needs to be paid if buy-to-lets are owned under names.

Although it sounds like double taxation, there are two different taxes, corporate tax and dividend tax. And, when owned via a limited company, you will pay less tax payment in total compared to the income tax paid for the buy-to-lets if personally owned.

Save on Inheritance Tax Payment-

Owning buy-to-lets via a limited company can help you save on a large amount of inheritance tax in the future without compromising the rental income if correctly set up. Make sure you start the company as a family investment company to achieve this because you won’t gain this advantage from a standard family investment company. Also, add your children as shareholders to benefit them from inheritance tax savings.

Property owners often exhibit a reduced inclination to seek out and invest in the services of professional advisors, especially within the realm of family property management. This reluctance may be attributed to the practice of advisors charging fees based on asset valuation rather than the time expended on their services. However, it is imperative to acknowledge that the absence of sound counsel in this domain can precipitate significant challenges, potentially leading to elevated tax obligations, as will become evident.

In Conclusion

For a higher-rate taxpayer, owning a new buy-to-let property by setting up a limited company can be a great option. It can provide you with better flexibility as you have to pay tax only on your rental profits and if you take money out of your business. And, when you know how to bring money out, it’s a tax-efficient alternative, especially for inheritance tax payment.

Sounds complicated? It’s worth speaking to a professional tax consultant specialising in this area for better decision-making. At Tax First Consultants Ltd., we can help you make plans regarding inheritance tax exposure so you can avoid it while setting up wills and trust funds, as per rules and regulations, to avoid paying penalties.

Contact us now for any tax services!

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