Buying investment properties through a limited company structure has been widely touted as the solution to the Government’s tax clampdown on landlords, but our analysis shows it is not the silver bullet it first appears to be. In fact, adopting this strategy would cut a landlord with a single property’s income by around £1,000 per year. 

In the past, landlords could deduct all their mortgage interest from rental income before working out their tax bill. But under changes which began in April, the amount they can deduct is being scaled back, so that by 2020 tax will be charged on their full income and they will get a 20% tax credit instead.

Landlords who buy their property via a limited company are excluded from these changes. But our calculations show that for most landlords, the high cost of limited company mortgage borrowing will outweigh any tax advantages. 

A limited company borrower can expect to pay 3.4% for a two-year fixed rate at 75% loan-to-value, compared to 1.92% for a landlord borrowing in their own name. 

The findings suggest only landlords with multiple properties benefit from a limited company structure, with four properties the tipping point.

Landlords looking to repurchase existing properties via a limited company are also likely to lose out as this move triggers costly capital gains and stamp duty taxes.  

A landlord earning £46,010 annually, comprising a £35,000 base salary plus £11,010 in rental income – the average for a two bedroom house in the UK – will have £36,194 in take-home income if purchasing as an individual after tax and mortgage costs.

If the same landlord purchased through a limited company, they would earn £34,825 in take home income – which is £1,369 less. 

The main reason is the higher mortgage costs – which add £2,147 a year to the limited company borrower’s bill.  

The benefits of purchasing investment properties through a limited company are only felt by those with multiple buy-to-lets.

Limited company landlords can subtract mortgage interest costs from their rental income before calculating their corporation tax. Even when paying income tax on a regular salary in addition to corporation tax, limited company borrowers will have a significantly reduced tax bill.

Having less to pay in tax eventually outweighs higher mortgage costs, but in the example used by Private Finance, this is only achieved once four or more properties are purchased. 

Based on the same annual salary as our previous example (£35,000), plus income from four rental properties at £11,010 each, our calculations show that a landlord with a portfolio of this size owned in his or her own name would take home £49,374 per year after tax and costs. If those properties were owned through a limited company structure, the earnings rise slightly to £49,644. The larger the portfolio, the greater the calculations shift in favour of the limited company option.

However, this is only the case when it comes to acquiring new buy-to-lets. If you already own a number of properties and want to repurchase them via a company there are much greater costs because of stamp duty and capital gains tax. These wipe out any advantage to the limited company strategy for most landlords.

A landlord with five rental properties, earning £90,050 in total (including salary) would have £53,768 in take-home income once mortgage and tax costs are deducted.
If the same landlord was to repurchase his or her properties via a limited company, they would have £54,584 in take home pay. 

Once typical capital gains costs have been factored in and spread across ten years, take home income is reduced to £49,663, which is a loss of more than £4,000 per year under the company structure.

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