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Dynamics of Limited Companies for Buy to Let


Dan Clinton, Senior Manager of Product Management and Pricing, The Mortgage Works

Incorporation is reinvigorating itself within the Buy to Let (BTL) sector following changes to the tax regime. Recent BVA BDRC research indicates almost two-thirds of landlords intend to purchase their next property through a limited company, which is a staggering statistic, and could grow further as the market transitions towards a more professional demographic.

Table 1: Cashflow Scenario 2020/21: Single Property Portfolio with £100,000 BTL Interest Only Mortgage

Deciding on whether to incorporate however, is not necessarily straightforward. There are many factors at stake, meaning it ultimately boils down to the landlord’s individual circumstances and business strategy.

Let’s shine a light on some of the high-level tax considerations a landlord is likely to be weighing up. I will caveat that comparisons with personal ownership can be very nuanced, so I’ll avoid sweeping statements and just stick to a few basic scenarios.

To start, many landlords will be looking at the economics of incorporating their existing portfolio through a ‘sale and purchase’. This can be expensive, as it will be subject to Capital Gains Tax (CGT) and Stamp Duty, so may only appeal to properties with lower values or marginal capital gains, or to landlords who are able to recoup the cost through a long-term investment strategy.

Cashflow is a crucial consideration. The scenario below compares a limited company to personal owners in the basic and higher rate tax brackets. This illustration shows a 20% taxpayer is better off as an individual, but a 40% taxpayer would achieve a higher annual return under a limited company – where the reduced tax liability more than offsets the higher mortgage cost. Scale this comparison across an entire portfolio and over a longer timeframe, and you can quickly see how the financial impact could accumulate into a substantial figure.

Calculation based on current tax rates

Profit extraction from a company is another important factor. This can be done in multiple ways, including dividends, salary, pension contribution and remuneration of a director’s loan.  The example below uses dividends to extract our net profit figure of £3,645. Each director is permitted an annual dividend allowance of £2,000 before tax is payable. Beyond that, the residual profit is taxed at different rates depending on their income tax band.

Table 2: Profit Extraction from Dividends

Calculation based on current Dividend allowance and Dividend Tax rates

The implications of CGT over the life of the investment is also significant. A Corporation Tax rate of 19% currently applies to limited companies, while individuals have an annual allowance of £12,000 before CGT rates at 18% or 28% are incurred by basic and higher rate taxpayers respectively. In the examples below, private ownership looks more attractive where capital gains are modest, whereas incorporation looks more appealing to higher rate taxpayers when the gains are far greater.

Table 3: Capital Gains (£20k)

CGT calculation based on current allowance and tax rates

Table 4: Capital Gains (£70k)

CGT calculation based on current allowance and tax rates

These are just a handful of considerations. Seeking professional tax advice is therefore essential for landlords, as this will help them determine the most appropriate business structure.