Investing in a buy-to-let property has been a popular choice for many investors in the UK. However, the tax implications of investing in a buy-to-let property can be complex, especially when it comes to investing through a limited company. In this article, we will take a closer look at the tax implications of investing in a buy-to-let property through a limited company.
Limited company buy-to-let investment has become more popular in recent years, as changes to tax rules have made it less attractive for individual investors. The main reason for this is that the rules for individual buy-to-let investors have been changed, so they can no longer deduct all their mortgage interest payments from their rental income before calculating their tax bill. Instead, they can only claim a basic rate tax deduction on the interest they pay.
For those who invest through a limited company, the rules are different. The interest payments on the company’s mortgage can be offset against rental income, and the company can also claim other expenses such as repairs and maintenance, letting agent fees, and insurance. This means that the profits from the rental income are taxed on the company’s profits, rather than the individual investor’s personal income. Here at Aventine Property, we offer deal sourcing services- from initial research to property completion.
One of the biggest advantages of investing in a buy-to-let property through a limited company is the lower tax rate. Limited companies pay corporation tax, which is currently set at 19% on profits up to £300,000. For profits over this amount, the tax rate increases to 25%. By comparison, the highest rate of income tax in the UK is currently 45%, so investing through a limited company can result in significant tax savings.
However, it’s important to note that there are also additional costs associated with setting up and running a limited company, such as accounting fees, legal fees, and administrative costs. These costs can eat into any tax savings made through the lower tax rate, so it’s important to carefully consider whether a limited company is the best option for your individual circumstances.
In addition to corporation tax, there are also other taxes to consider when investing in a buy-to-let property through a limited company. The company will be required to pay stamp duty land tax (SDLT) on the purchase of the property, and this can be higher for companies than for individuals. This is because companies are subject to an additional 3% SDLT surcharge on top of the standard rates.
There are also potential capital gains tax (CGT) implications to consider. When a limited company sells a buy-to-let property, any profits made on the sale are subject to corporation tax rather than CGT. However, if the property is sold and the proceeds are used to pay dividends to shareholders, these dividends will be subject to income tax at the individual’s personal tax rate.
Another factor to consider is the potential impact on inheritance tax (IHT) liability. If a buy-to-let property is owned by an individual, it will form part of their estate for IHT purposes. However, if the property is owned by a limited company, it will not form part of the individual’s estate, which could reduce the IHT liability.
It’s worth noting that investing in a buy-to-let property through a limited company is not always the best option, and it’s important to seek professional advice to determine the best structure for your individual circumstances. Other factors to consider include your long-term investment goals, your other sources of income, and your overall tax position.
In summary, investing in a buy-to-let property through a limited company can result in significant tax savings, particularly in light of recent changes to tax rules for individual investors. However, there are also additional costs to consider, and it’s important to carefully weigh up the pros and cons before making a decision. Read Pros and Cons of buy to let as a limited company.