How does buy-to-let tax work as a limited company?

Setting up a limited company is a viable option for investors, especially those who are looking to build a large portfolio rather than invest in a single property. Setting up a limited company for the purposes of investing in buy-to-let property is the same as setting up any other company and can be done simply and quickly.

These are the main benefits and drawbacks of investing in UK buy-to-let property as a limited company:

Benefits

  • Investing as a limited company makes it easier to reinvest the profits at a lower tax rate, allowing an investor to build a portfolio more efficiently and economically.
  • Rental profits are taxed at only 20% if they total less than £300,000.
  • Capital gains are charged at the corporation tax rate which is currently 20%. This is a much more benign rate than the usual rate which can reach as high as 28%.
  • Investing through a limited company potentially makes it easier to pass on your property portfolio to a benefactor and avoid Inheritance Tax. All your properties can be counted as one "potentially exempt transfer" which means that no Inheritance Tax will be accrued so long as you live for seven years after making the gift. If properties are bequeathed individually then they would form part of the net value of the deceased's estate for tax purposes.

Drawbacks

  • When investing via a limited company it can be tricky to get money out of your investment. It can be easy to push yourself into a higher, more expensive tax bracket if you remove a large sum of money in one year. For this reason, it can feel like investing through a limited company is effectively locking your money up.
  • It is not easy to transfer personally held properties into a company as such a move is viewed as a tool to avoid paying Capital Gains Tax and you will be charged accordingly. There would also be a Stamp Duty bill on properties worth more than £125,000 which could make the move very expensive.
  • Forming a limited company could be more hassle than it is worth for investors who only own one or two buy-to-let properties.
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