The buy to let property market in the UK, despite all the media coverage to the contrary, can still be a good investment for those looking to grow their wealth long-term. Many buy to let investors fall into being a landlord accidentally. These investors are unlikely to have thought long and hard about the tax implications of having a buy to let investment. In this article, we’ll cover the five steps to managing your properties, looking at how to set up a company for buy to let and why it might be a wise decision from a tax perspective.
Step 1: Discuss your personal circumstances with an accountant
It’s important to understand the tax implications and the additional obligations if you set up a company for buy to let property portfolios. Taking advice from an accountant ensures you understand the costs involved and the likely tax savings over having the rent taxed under income tax rather than corporation tax.
Step 2: Register your company with Companies House
To set up a company for buy to let portfolios (which could just be one property), you’ll need to register a limited company with Companies House, the official registrar of companies in the UK.
Many investors will opt for a special type of limited company specifically to hold buy to let properties. This company type is called a Special Purpose Vehicle (SPV).
There are a couple of advantages of creating a SPV for holding buy to let properties:
- Some lenders will only lend to SPVs.
- Mortgage rates on SPVs may be more favourable than a standard BTL mortgage.
The process to set up a company for buy to let property management is relatively straightforward online. You’ll need to take the following steps:
- Choose a trading name for your limited company. This name must not be the same as a currently active company.
- Identify your registered address for the company. This could be your place of business, your office or home address, or your accountant’s office.
- Select your company directors and shareholders. This could be one person or more and you can be either a director or shareholder or both concurrently. Add the information on share capital.
- Select the appropriate SIC code which is the business category. For SPV companies, you choose from:
- 68100 – a company involved in buying or selling properties.
- 68209 – a business that lets or operates leased properties.
- 68320 – the management of property.
- 68201 – property renting or running housing association properties.
If you are unsure about how to set up a limited company or SVP, you can ask an accountant to manage the setup on your behalf.
Step 3: Open a dedicated business bank account
It’s always a good idea to keep personal and business finances separate even as a sole trader to make bookkeeping much easier. However, a limited company must have a dedicated business bank account to operate. You can set up a company for buy to let property management before you have a business bank account but as soon as you start making payments or taking income, you must use your business account.
Business bank accounts don’t have to be expensive anymore. You can find accounts costing around £5 a month which can be automatically linked to your accounting software such as Xero or QuickBooks. Some accounts come with additional perks such as a free bookkeeping software subscription for an initial period or business insurance, so it’s work shopping around for the best product to suit your needs.
Step 4: Appoint a tax agent
Also, known as an accountant, you will need someone to manage your tax returns if you have set up a company for buy to let property. This is because you must complete a Corporation Tax return to HMRC as well as an Annual Accounts return to Companies House. Corporation tax returns can only be submitted using HMRC software – you can’t simply go online like you can with a self-assessment tax return.
In addition, a tax accountant has specialised knowledge and keeps up to date with changes in tax law so you can be certain of claiming the right allowances and reliefs as well as deductible expenses to minimise your tax liability.
Finally, should you be subject to a tax investigation, your accountant can liaise with HMRC on your behalf reducing any stress from the process.
Step 5: Obtain legal advice
Renting out property can give you a great additional revenue stream but it’s not without its potential pitfalls. Ensure you seek legal advice to comply with your obligations as a landlord. From time to time, letting property can lead to disputes between tenants and landlords, so having the right legal counsel and insurance is vital to protect your financial future and your reputation.
Set up a company for buy to let property to minimise your tax bill
If you let property as an individual, you’ll need to submit a self-assessment tax return. Your property income will be taxed at your marginal tax rate. This means if you have other income, such as employment or a sole trader business, you could pay as much as 45% income tax on your rental income.
The income tax bands as of 2023/24 are:
- 0% Income Tax on the first £12,570 of income due to the Personal Allowance.
- 20% Income Tax from £12,571 to £50,270.
- 40% Income Tax from £50,271 to £150,000.
- 45% Income Tax on anything above £150,000.
As a result of changes to tax law, known as Section 24 of the Finance Act 2015, landlords can no longer deduct mortgage interest (or other financing costs) from their rental profits. This has led to a sharp increase in the amount of income tax paid by landlords who are not holding their property through a limited company.
Many landlords have therefore set up a company for buy to let because the overall tax take is lower. Incorporated companies allow 100% of the mortgage interest paid to be deducted from taxable profits. In addition, the standard rate of Corporation Tax is 19% for small profits (correct for 2023/24) and a sliding scale between 19-25% for businesses with profits between £50K-£250K. You’ll still need to pay either Dividend Tax and/or Income Tax on profits you pay yourself from the business.
Getting help to set up a company for buy to let property owners
If you aren’t sure whether to set up a company for buy to let or pay self-assessment income tax, talk to an accountant who can work through the numbers with you to see what makes the best financial sense. Don’t forget to include the additional costs incurred when running a limited company when calculating the best option for your circumstances. Our team here at Green & Peter will help you figure it out – call us on 0208 446 8100 or email in**@gr***********.uk
