Tax Benefits of a Limited Company BTL Mortgage?

The Impact of Recent Tax Changes on Individual Landlords

In recent years, UK tax changes have made it more difficult for individual landlords to maintain profitability. The most significant change is the phasing out of mortgage interest tax relief. Prior to April 2017, landlords who owned properties in their personal names could fully deduct mortgage interest payments from their rental income before calculating their taxable profits. This allowed many landlords to minimise their tax bills, particularly those in higher tax brackets.

However, under new rules, individual landlords can no longer deduct mortgage interest from their rental income. Instead, they are entitled to a basic rate tax credit (currently 20%), regardless of their tax bracket. This has led to larger tax bills for higher-rate and additional-rate taxpayers, who are taxed at 40% and 45% respectively. As a result, many landlords are left with significantly reduced net rental income.

In light of these changes, structuring buy-to-let investments through a limited company has become an increasingly attractive option for those looking to protect their profits.

The Tax Benefits of a Limited Company Buy to Let Mortgage

There are several key tax benefits to using a limited company for buy-to-let investments. Below, we outline the most important advantages that landlords can gain by switching to this structure.

1. Full Deductibility of Mortgage Interest

One of the most significant tax benefits of using a limited company for buy-to-let is that mortgage interest remains fully tax-deductible. Unlike individual landlords who can no longer offset their mortgage interest against rental income, limited companies can treat mortgage interest as a business expense. This means that a company’s taxable profits are reduced by the full amount of mortgage interest paid.

For landlords with substantial mortgage debt, this can result in significant tax savings. Since mortgage interest is often one of the largest expenses associated with running a rental property, being able to deduct it in full can make a major difference to the bottom line.

2. Lower Corporation Tax Rates

Rental profits earned by a limited company are subject to corporation tax rather than personal income tax. As of 2024, the corporation tax rate in the UK is 19%, significantly lower than the higher (40%) and additional (45%) income tax rates that many individual landlords face.

For landlords who are in higher tax brackets, moving their buy-to-let investments into a limited company can substantially reduce the amount of tax they pay on their rental income. For example, if an individual landlord is paying 40% income tax on rental profits, switching to a limited company could almost halve their tax liability to just 19%, preserving more of the rental income.

3. Efficient Retention and Reinvestment of Profits

Another key advantage of using a limited company is the ability to retain profits within the company for future reinvestment. In contrast to individual landlords who are taxed on all rental income (even if they plan to reinvest it), limited companies can keep profits in the business, where they are only subject to corporation tax. These retained profits can then be reinvested into purchasing additional properties or covering other business expenses without triggering further personal tax liabilities.

This structure makes it much easier to grow a property portfolio over time, as profits can accumulate in the company and be reinvested more tax-efficiently than they would be for an individual landlord.

4. Dividend Payments and Income Flexibility

If a landlord wants to withdraw profits from their limited company, they can do so by paying themselves dividends. Dividend income is taxed differently from rental income, and there is a tax-free dividend allowance (currently £1,000 per year). Beyond this allowance, dividends are taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers.

This dividend structure gives landlords more flexibility in managing their income. For example, a landlord can choose to take only enough dividends each year to stay within the basic-rate tax bracket, minimising their personal tax bill. The remaining profits can be left in the company, where they are only subject to the lower corporation tax rate.

5. Long-Term Tax Efficiency and Inheritance Planning

Using a limited company can also offer benefits in terms of long-term tax planning, particularly when it comes to inheritance tax. If a landlord holds buy-to-let properties in their personal name, these properties are considered part of their estate upon death and may be subject to inheritance tax (currently charged at 40% on estates above the threshold).

However, by holding properties through a limited company, landlords can transfer shares in the company to their heirs over time, potentially reducing inheritance tax liabilities. Shares in the company may also be passed on more efficiently than individual properties, allowing for better succession planning.

Challenges and Considerations

While the tax benefits of a limited company buy-to-let mortgage are clear, there are some challenges to consider. Setting up and managing a limited company comes with additional administrative and legal responsibilities, such as filing annual accounts and corporation tax returns. There may also be higher mortgage interest rates for limited company mortgages compared to personal buy-to-let mortgages, as lenders view these structures as slightly riskier.

Moreover, withdrawing profits from the company can incur additional tax liabilities in the form of dividend tax or income tax on salaries. Therefore, it’s important to carefully plan how and when profits will be extracted from the company.

Before deciding to switch to a limited company structure, landlords should seek advice from a tax professional to ensure that the benefits outweigh the costs and administrative requirements.

Financing a Limited Company Buy to Let Mortgage

Securing a mortgage for a limited company buy-to-let property is no more complex than obtaining a personal buy-to-let mortgage.

There are many lenders who specialise in providing limited company buy-to-let mortgages, offering competitive rates and flexible terms to meet the needs of property investors. This is where Evolve Finance can help.

How Evolve Finance Can Help You Secure Financing

At Evolve Finance, we understand the unique needs of landlords who are looking to maximise the tax benefits of their buy-to-let investments by using a limited company. We specialise in sourcing tailored mortgage solutions for property investors, offering a range of products designed specifically for limited companies.

Here’s how we can assist:

1. Expert Guidance: Our team of experienced experts will guide you through the process of setting up a limited company and securing the best possible mortgage for your buy-to-let property. We’ll explain the nuances of limited company mortgages and help you understand your options.
2. Access to Specialist Lenders: We work closely with a wide network of lenders, including those that specialise in limited company buy-to-let mortgages. This allows us to find competitive rates and terms that suit your investment strategy.
3. Personalised Solutions: Every investor’s situation is unique, and we take the time to understand your specific goals and requirements. Whether you’re purchasing your first buy-to-let property through a limited company or expanding an existing portfolio, we provide bespoke financing solutions tailored to your needs.

Reach out and give us a call: We’re not just here to help you secure financing for one property; we’re here to support your long-term property investment journey. As your portfolio grows, we’ll continue to provide expert support and mortgage solutions that help you achieve your goals.

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Conclusion

Choosing a limited company buy to let mortgage offers several significant tax benefits, particularly for higher-rate taxpayers and landlords looking to expand their portfolios. By retaining full mortgage interest deductibility, paying lower corporation tax, and offering flexibility with income distribution, the limited company structure allows landlords to maximise profits and reinvest in their business more efficiently.

If you’re considering making the switch to a limited company for your buy-to-let investments, it’s crucial to secure the right financing. Evolve Finance can help you navigate the complexities of limited company mortgages, offering expert guidance and access to the best mortgage products for your needs. Reach out to us today to learn more about how we can support your property investment strategy.