For many investors, the idea of investing in property is the acquisition of a tangible, “real” bricks-and-mortar asset. Investing in property provides an opportunity to generate immediate cash flow via rental income whilst also offering long-term growth through capital appreciation.
Below we outline four tips for making sure you're tax ready.
- Keep Accurate Records Year-Round – Log all rental income and expenses as they happen. This will help ensure you claim every allowable expense.
- Stay HMRC Compliant with Digital Bookkeeping – Making Tax Digital (MTD) is coming, and landlords will soon need to adopt tools and processes to keep digital financial records and file quarterly returns.
- Avoid Late Filing Penalties – You must file your self-assessment by January 31st of the following year. Missing the deadline can lead to fines or worse.
- Leverage Software To Streamline Tax Season - Software like Landlord Studio helps you generate financial reports, categorise expenses, and stay organised for faster, more accurate taxes.
Seven in 10 landlords planning to expand their portfolios this year intend to buy new buy to let properties through a limited company, research reveals.
A survey conducted for Paragon Bank reveals that 69% of these landlords will opt for this structure, the second highest figure recorded.
Only a quarter of landlords will purchase in their personal name, with others undecided.
Paragon’s head of mortgage sales, Jason Wilde, said “the trend towards limited company structures has accelerated in more recent years, mainly due to changes to mortgage interest relief, but also landlords considering Inheritance Tax planning. Over 80% of our customers are now purchasing within a limited company structure. As many of them operate as SMEs, adopting a business structure makes sense and is more tax efficient.
Limited companies also benefit from an interest cover ratio of typically 125%, versus 145% for higher-rate taxpayers buying in personal name, so it broadens the availability of buy to let mortgage finance.”
While incorporation has grown, most landlords (78%) still hold properties in their own name. However, 9% own all their properties via a limited company, rising to 28% for those with four or more rentals.
A further 13% use a mixed approach, typically favouring incorporation.
Tax advantages and financial planning are key motivations – for 45% of landlords with limited company properties, personal income tax benefits are crucial, while 42% cite mortgage interest relief.
Corporation tax rates influence 33%, and 27% mention inheritance tax planning.
Those without limited company properties often highlight transfer costs (52%), capital gains tax concerns (32%) and administrative burdens (31%).
Set up a limited company for property investing (if you are looking to establish a portfolio)
Since 2016, limited companies have become an increasingly popular structure used by property investors. They not only provide a range of tax-efficiencies, but a series of other benefits, from reduced liability to increased flexibility.
An important step to unlock all these benefits is ensuring the set-up of the company is correct. That's why we've broken down the key steps to take and considerations to make when setting up a limited company:
- Pick the right Standard Industrial Classification (SIC) Code for your company
- Choose a share structure that allows you to remain flexible and scale
- Make sure you have an accessible UK address to put as your company's registered address
- Use the right legal documents required, and write them for the BTL use case
- Set up a business account compatible with mortgage lender requirements
- Handle the ongoing management and accounting for your limited company
Although there are a few steps to ensure you're company is set-up efficiently for the best property investment experience, there are services that can support in the creation and ongoing management of you limited company.
What taxes do you pay as a UK limited company for property investment
If you hold your property in a limited company, the company is a legal entity on its own and is separate from the shareholders and directors of the company. This means the limited company is the structure being taxed rather than the company’s owners.
So, when does your limited company need to pay tax? It is typically at three main points:
Purchasing the property: Stamp Duty Land Tax
When you initially purchase a property through a limited company, you’ll be charged Stamp Duty Land Tax (SDLT). You are subject to pay SDLT if you purchase a property over a certain amount, for buy-to-lets if your property is worth more than £250,000 you are required to pay SDLT. There is a minimum 5% SDLT surcharge if your buy-to-let purchase results in your owning more than one property.
The rates, which are payable only on the portion of a property price that falls within each band, were updated in the mini budget on 23 September 2022 (valid until 31 March 2025) and are set out below.
Brackets Rate
Up to £250,000 5%
The next £675,000 (the portion from £250,001 to £925,000) 10%
The next £575,000 (the portion from £925,001 to £1.5 million). 15%
The remaining amount (the portion above £1.5 million) 17%
Receiving profits from your investment: Corporation Tax
Purchasing a property in your own name means you are subject to Income Tax and National Insurance contributions. When buying through a limited company you are not required to pay either of these and are only charged Corporation Tax on your rental income.
Selling your property investment: Capital Gains Tax
Depending on your tax bracket, you can be charged 18% or 28% CGT when you sell a property bought in your own name. If you are selling a property that you bought using a limited company, you can sell the shares of the company instead. The CGT for this is either 10 or 20%.
Certain tax regulations only apply to limited company buy-to-lets, apart from the above tax implications, here are a few considerations to be aware of:
Dividend Tax
Limited company owners pay Dividend Tax on any income they withdraw. You have a £500 tax-free dividend allowance beyond this, dividend tax rates apply.
Mortgage Interest Refief
Owning properties through a limited company allows mortgage interest to be deducted as a business expense, lowering your corporation tax liability.