One of the key advantages of using a limited company to get a buy-to-let mortgage is the ability to deduct running costs from rental income before paying tax. These deductible costs include insurance, maintenance, and, importantly, mortgage interest.
Since 2017, individual landlords have no longer been able to fully deduct mortgage interest from their income to reduce their tax bill. This change led many to switch to limited company structures, where mortgage interest remains fully deductible.
Instead of paying income tax on rental earnings, limited companies pay corporation tax on their profits, currently at 19% for profits up to £50,000, which can be more tax-efficient, particularly for higher-rate taxpayers.
For example, a limited company landlord who has £24,000 of rental income and pays £7,000 of mortgage interest will be liable for corporation tax at a rate of 19% on £17,000 (that’s (£24,000 minus £7,000). That means a tax bill of £3,230, leaving a profit of £13,770.
A higher-rate taxpayer landlord who has the same £24,000 of income and £7,000 of mortgage interest will be liable for income tax at a rate of 40% (£9,600). They can claim tax relief at a rate of 20% on the lowest of either the finance costs, property profits or adjusted total income – in this case, the lowest amount is the mortgage interest (£1,400). This leaves a tax bill of £8,200 and a much lower profit of £8,800.
While the company route appears more tax-efficient in this case, there are extra considerations. Profits withdrawn as dividends are subject to dividend tax. Company buy-to-let mortgages can also have higher interest rates than standard ones.
Also, limited companies pay stamp duty on property purchases, including when existing properties are transferred into the company, and don’t benefit from the Capital Gains Tax allowance available to individuals.
It's best to speak with a tax adviser to assess whether setting up a limited company or Special Purpose Vehicle (SPV) is the right move for your situation.
