Setting up a limited company to invest in buy-to-let property has become increasingly popular over recent years, as determined investors continue to boost their returns.
Thanks to a combination of continued house price growth and rising tenant demand in the private rented sector, investors continue to see the UK property market as one of the strongest sources of healthy returns, particularly in a climate of a certain amount of economic volatility.
However, over the years, various tax changes have been one of the main factors affecting the bottom lines of some investors. The main one has been the well-publicised removal of mortgage interest costs as a tax deductible expense, known as Section 24. This change, brought in by Chancellor George Osborne in 2017, means landlords can claim a 20% tax credit instead – and for higher-rate taxpayers in particular, this has meant a bigger income tax bill.
This is one of the factors that has driven a huge rise in the number of investors setting up limited companies to hold their properties, rather than owning them as an individual, because they are treated differently for tax purposes. This increase demonstrates that, contrary to the popular picture that landlords are leaving the sector, many are in fact continuing to invest, but in a new way.
The growth of the limited company
According to the latest figures from Hamptons, the number of new properties bought in England and Wales in the year to September by a limited company hit 85,000. This is an exponential rise of 165% compared with the 12-month period between September 2016 and September 2017, when Osborne’s tax changes began to take effect.
Further to this, the study by Hamptons, which used Companies House data, found that more than three quarters of limited companies that owned buy-to-lets in 2017 had gone on to acquire more properties. Big limited company landlords also dominated the data, with 90% of those companies that had expanded their portfolios now owning 20-plus properties.
Over the past 12 months, 27% of purchases in the last 12 months were made by a limited company with a single property, up from 20% in 2017. Back then, incorporation was more common among landlords with larger property portfolios.
Aneisha Beveridge of Hamptons says that these figures indicate several things about the buy-to-let market and investor appetite – one being that the fact limited company landlords are continuing to making investments indicates that they are “in it for the long run”, due to the costs associated with buying property in this way.
“There’s been a lot of talk recently about how buy-to-let is dead. But the growth in the buy-to-let limited company market paints a different picture,” she said.
Investing in 2025
Many existing and prospective landlords looking at investing in 2025 are likely to be considering whether using a limited company would be the right option for them. The first point of call is often a financial adviser, who can look at your personal circumstances to decide what the best solution would be.
In terms of profitability, selecting a well-located investment property that ticks the right boxes in terms of what it can offer to tenants, and one that’s in an area that’s forecast for further growth, are important factors to consider. That being said, recent data from Paragon Bank has revealed that landlord profitability on the whole has increased over the past two years.
Tax is another important consideration, and this is more prominent for those looking to invest in 2025 since the government announced an increase to the stamp duty surcharge that applies on any property purchase in addition to your main residence. This, along with considering capital gains tax, is where looking into setting up a limited company can also play a part.
Moving an existing property portfolio into a limited company can trigger both of these taxes, as it is technically under new ownership. You may be liable to pay capital gains tax on any profits made above the threshold since you originally purchased it, even when selling it to a limited company that you own. Likewise, as it is technically a ‘new’ purchase, stamp duty is also likely to be due.
However, for landlords looking to make a new purchase, doing it using a limited company could be beneficial.
For higher tax payers in particular, a limited company buy-to-let can be particularly appealing as rather than paying personal income tax on rental income, you pay corporation tax, which is currently 25% for profits over £250,000, or 19% for profits under £50,000 (2023/2024 tax year). This compares favourably with the higher income tax bands (20% for basic, 40% higher rate and 45% additional rate).
An incorporated buy-to-let can also deduct 100% of its mortgage interest costs as an expense from its income, as it is considered a business expense.
On the flip side, investing through a limited company might save you money, particularly if you are a basic rate tax payer and only own one or two properties, for example. The cost of incorporating and running the company may end up outweighing the tax savings you make.
If you decide to sell your rental property, there is no allowance given on the amount of capital gains tax owed, meaning you will have to pay the full amount owed on any profits made. By contrast, an individual can currently claim an allowance of £3,000 of any profit made (2024/2025 tax year), before the CGT rate kicks in. While this £3,000 figure may not make a big difference when looking at the profits of some investors, for others it is worth considering.
Overall, it will largely depend on personal circumstances, as well as future goals and plans, when deciding whether to operate as an individual or via a limited company structure, and conducting thorough research or taking professional guidance is always advised.
