Renting out property has long been used as a way to bring in extra income, but recent changes to how this money is taxed have made being a landlord much less attractive.
Some landlords are working around this by owning their buy to let property through a limited company. But what is a limited company, and how does using one to let out your property change how your income gets taxed?
Here we answer your questions, and look at some of the pros and cons of holding a property through a limited company, so that you can make the right choice for you.
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.
Contents
- How much will I be taxed on my rental income?
- What is a limited company?
- How much will I be taxed for letting a property through a limited company?
- How do I get money out of a limited company?
- How much will I be taxed for selling a property through a limited company?
- Can I transfer a property I already own into a limited company?
- Is it worth setting up a limited company to let property?
How much will I be taxed on my rental income?
You will pay income tax on the money you make from letting a property outside a limited company, if that income pushes you over your personal allowance. The personal allowance is the amount of income you can earn each tax year without having to pay tax, and for the 2023/24 tax year is £12,570.
Certain expenses are deductible from the tax you pay if they are incurred solely for the purposes of renting and maintaining the property. These include the cost of insurance policies, repairs, and cleaning.
However, between mortgage repayments and tax bills, making a profit through letting property personally can still be a challenge, and changes to how taxation works have made it even harder. Landlords used to be able to deduct mortgage interest in full from their rental income before being liable to tax, which meant that higher-rate taxpayers benefited from significant tax relief on their profits. However, the amount of mortgage interest tax relief that can be claimed has been gradually reduced over time, and now stands at a flat tax credit of 20% on mortgage interest.
You will also have to pay capital gains tax (CGT) if you sell the property and make a profit that exceeds your current annual allowance. In the 2023/24 tax year, the CGT allowance stands at £6,000. If you’re a basic-rate taxpayer and your income is £50,000 or less a year, you’ll pay capital gains tax at a rate of 18% on any profits above your allowance, rising to 28% if you’re a higher-rate taxpayer with an income above this amount.
What is a limited company?
A limited company is a type of business that is treated as a separate legal entity from its owner/owners. A limited company has one or more members, who are shareholders or owners. The company’s finances are separate from the owner’s, and are taxed differently. When you see the abbreviation “Ltd” at the end of a company name, it’s a limited company.
Most importantly, owning property and earning rental income within a limited company structure will subject you to vastly different tax rules than doing so personally, and for this reason it has become an increasingly popular choice among landlords.
How much will I be taxed for letting a property through a limited company?
The key difference for those letting and selling a property through a limited company is you will not be subject to income tax or CGT. Instead, you will pay corporation tax, which has different rates depending on the amount of profit your company makes. If your company makes more than £250,000 profit, you’ll pay 25% of all profits, whereas if your company makes £50,000 or less, you’ll pay a lower rate of 19%. This rate applies to both rental yields and any profit when you come to sell the property.
This could be financially beneficial if you’re a landlord, and particularly if you’re a higher-rate taxpayer who would usually pay far more tax. For landlords letting property outside a limited company, income tax is liable at 20%, 40% or 45% depending on your tax bracket. So, if you’re a basic rate tax payer, paying tax at just 19% appears attractive, and if you’re a higher or additional rate tax payer, paying tax at just 25% could be appealing too.
The catch is that, as previously stated, the company’s finances are separate to your own. So, any income from letting a property through a company belongs to the company and you cannot simply dip into this pot and take an income. Getting money out of a limited company, even one that you own, could see you subject to tax bills that potentially wipe out the savings you’ve made if you’re not careful.
How do I get money out of a limited company?
You need to carefully manage how you take money from a limited company. The two main ways of getting money out of a company are by paying dividends to shareholders (yourself), and a basic salary:
Dividends
Dividends are payments made to shareholders of a company. There are technically no rules about how often you can pay a dividend or how much you can pay, and provided your company has retained some profits then you can in theory take out as much as you like.
You do, however, have to pay tax on dividend income, and the amount depends on your tax rate. Basic-rate taxpayers pay 8.75%, rising to 33.75% for higher-rate taxpayers, and 39.35% for additional rate taxpayers.
Yet dividends are subject to two forms of tax relief. Firstly, as they count as income, they fall under your annual personal allowance. This is the amount of income that you can earn each year tax-free, and in 2023/24 it sits at £12,570. Note that this allowance has to be applied to your net income as a whole for the entire year from all of your income sources combined, so you can’t apply it to both dividend income and another income source separately. Secondly, you receive a dividend allowance of £1,000 each tax year, and only pay tax on dividend income that exceeds this.
Salary
The other way of moving money out of a limited company is by paying yourself a regular salary.
You’ll have to pay income tax and National Insurance Contributions (NICs) on any salary taken. The business will also pay 13.8% Employer’s National Insurance Contributions on any salary you receive above the NIC Secondary Threshold, at £9,100 for the 2023/24 tax year.
Income you receive as a salary also falls under your annual personal allowance, although you will still have to pay 12% Class 1 National Insurance on earnings between £12,576 and £50,268, this is known as the Primary Threshold.
It’s usually most financially beneficial to work out a combination of dividend income and salary payments that results in the least amount of tax. You can speak to an accountant to find the best way to do this, without incurring additional tax charges.
How much will I be taxed for selling a property through a limited company?
If you are selling without a company, you may have to pay CGT on the sale of a buy to let property. Remember that you have a CGT annual allowance of £6,000, which is deductible on any profits before you pay tax.
By contrast, if you sell a property through a limited company and make more than £250,000 in profit from it you will have to pay 25% corporation tax, but if you make £50,000 or less in profit, you’ll pay 19%.
So, if you are letting a single, relatively cheap property on a short-term basis then it may be more cost-effective to own and sell it as an individual, rather than through a limited company. This way, any capital gains tax paid after applying the allowance will likely be lower than paying the corporation tax at full price.
Can I transfer a property I already own into a limited company?
It is possible to transfer a property from personal ownership into a limited company, but there can be significant costs involved. This is because you’ll have to pay one-off stamp duty charges and capital gains tax at the time of transfer. It’s essential to seek professional tax advice if you’re considering going down this route.
Is it worth setting up a limited company to let property?
As you might have already guessed, there’s no one simple answer to this question, as it will depend entirely on your situation and the kind of property or properties you are letting.
Certainly, it can be more profitable to let property through a limited company, particularly if you expect the earnings to be high, as the tax benefits become much greater for those in higher tax brackets.
The other factor to consider is that, of course, setting up and managing a company is not a simple task. It demands plenty of time, planning, effort and attention, particularly if you don’t employ an accountant on an ongoing basis, and it may be unsustainable unless you are comfortable with the commitment involved. If you want help from an accountant, you can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
You can read about how to set up a limited company on GOV.uk, and find out more about buy to let as an investment opportunity in our article Is buy to let a good investment?
Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.
If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.
If you’d like to see how much you might be able to borrow for a buy to let property, simply enter your expected rental income in our buy to let mortgage calculator to get an estimate.
Rest Less Money is on Instagram. Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.