Back to Basics: How to set up a limited company for buy-to-let properties

Paul Brett

March 30, 2021

Paul Brett landbay

Paul Brett is managing director of intermediaries at Landbay

More and more landlords are setting up limited company for their buy-to-let portfolio because it can be more tax efficient.

It should be noted that this route is not for everyone, so it’s best to seek advice from a tax accountant to see if limited company status is the best way forward.

For landlords with a few properties, it is certainly worth considering. Changes to tax relief on mortgage interest payments between 2017 and 2020 have resulted in larger tax bills for some landlords.

The tax rules are different for BTL investors who are individuals and those who have set up a registered company.

Individuals pay tax on all income, including rental income and any other such as salary and/or pension, which is 20%, 40% or 45% depending on which tax bracket you are in.

Limited company landlords pay corporation tax on their profits, currently 19% until April 2023. After that date companies with annual profit below £50,000 will still pay 19%, but above this, corporation tax rate will rise gradually from 19% to 25% at £250,000.

Smaller landlords will probably not be affected by this but for larger landlords and those who have properties in expensive areas, taxes could rise.

Special purpose vehicle

To establish a limited company, firstly, you need to set up a special purpose vehicle (SPV) for holding and renting property and register it at Companies House.

You must include a standard industrial classification (SIC) code which indicates the type of business your company is involved in.

For landlords it will be one of the following codes:
• 68100 – Buying and selling of real estate
• 68209 – Other letting and operating of own or leased real estate
• 68320 – Management of real estate

You will need to set up a new business bank account in the name of the company and register for tax payments with HMRC.

You are now a director of the company and you may have other directors too, but you will all be legally responsible for it.

Properties can now be bought by the company but lenders will usually take a personal guarantee from the directors.

This means if the company incurs debts and cannot repay the lender, the directors are personally responsible for making the repayments.

Transferring property into a limited company

Landlords can transfer existing properties owned as an individual into a limited company, but there are likely to be hefty set up charges.

Basically, you are selling the property to a company, so the company is the new owner and the sale will be liable for stamp duty and possibly capital gains tax.

You must also redeem your current mortgage, which could have early repayment charges, and take out a new mortgage – but the equity in the property can be used as your deposit.

The deposit can be moved into a limited company in many ways so you need to take advice from accountants/tax specialists on the best way of structuring this.

But you should also work with your specialist mortgage broker who is aware of the lender’s requirements.

Not all lenders will lend to limited company landlords, it is usually the specialist lenders who work in this area.

So there is a lot for landlords to think about in deciding whether to move into limited company status and it very much depends on personal circumstances.

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