Landlords: Could using a limited company reduce your tax bill?

A tenant signing a rental agreement.

Landlords looking to cut their tax bill might want to consider using a limited company to run a buy-to-let business. Research suggests that it’s something more property owners are doing. 

At a time when other outgoings may be rising, such as mortgage payments, reviewing how you manage your property portfolio could help you balance costs. Read on to find out why a limited company could be a useful option to consider. 

Removing mortgage interest as a tax-deductible expense may have increased your tax liability 

Former chancellor George Osborne removed landlords’ ability to claim mortgage interest as a tax-deductible expense in 2016. The change was gradually rolled out between 2017 and 2020. 

It was replaced with a 20% tax credit that offers a similar tax benefit to basic-rate taxpayers. However, landlords paying a higher rate of Income Tax may have found they’re worse off. This switch has been exacerbated by interest rates rising over the last couple of years. 

According to estate agents Hamptons, in 2015, a higher-rate taxpayer who was receiving £1,000 a month from a rental property and paying £500 a month in mortgage interest (assuming no other costs) would pay 40% tax on their £6,000 profit. This works out to a tax bill of £2,400. 

The same landlord in 2020 would be taxed at 40% on the £12,000 rent they earned and receive a 20% tax credit to £1,200. So, they’d face a tax bill of £3,600 – a 50% uplift.

If you factor in interest rate rises, your bottom line could be severely affected by the tax changes. 

A record number of buy-to-let companies were set up in 2023

With rising tax bills in mind, it’s not surprising that landlords are looking for a way to reduce their potential liability.

In 2023, more than 50,000 buy-to-let companies were set up, research from Hamptons found. Overall, by the start of 2024, there were more than 345,000 active buy-to-let businesses. More than two-thirds of active companies have been set up since 2017.

Using a limited company for buy-to-let operations isn’t a new solution. However, the type of landlords that are setting up companies has changed.

Before 2016, most landlords using a limited company were portfolio investors with several properties and smaller landlords tended to hold properties in their own name. Now, more landlords with smaller portfolios are starting a company – there was an almost 22% increase in the number of homes held in companies with just a single property in 2023. 

There was also a 10% increase in the number of outstanding mortgages on properties held in a limited company. Indeed, it’s estimated that three-quarters of limited company buy-to-let properties have a mortgage charge against them. 

So, having a small property portfolio or outstanding mortgage doesn’t automatically mean that a limited company isn’t an option for you.  

A limited company may reduce tax liability but there are potential drawbacks too 

From a tax perspective, a limited company can offset mortgage interest to reduce the amount of tax paid.

In addition, higher-rate taxpayers could pay a lower rate of tax on the rental income by using a limited company. In 2023/24, the main rate of Corporation Tax is 25%, and 19% if you qualify for the small profits rate. 

There might be other benefits to choosing a limited company too. For example, if you’re worried about Inheritance Tax, property held within a company could provide you with more options.

Keep in mind, that taxation can be complex and subject to individual circumstances. So, if you’re thinking about setting up a limited company to reduce your tax liability, it’s important to understand what it’ll mean for you. Speaking to a tax specialist before you move forward could be useful. 

Of course, there are drawbacks to using a limited company you might need to weigh up too.

If you’re a basic-rate taxpayer, it could lead to greater tax liability. 

As a director of a company, you’ll also be required to keep accurate company and financial records, which will need to be submitted to Companies House and HMRC. This extra responsibility can be time-consuming or, if you appoint an accountant to deal with it, add an extra cost to managing your property portfolio. 

If you have a mortgage on a property, you should also note that lenders may charge higher interest rates and fees to limited companies when compared to individual buy-to-let mortgages. 

Even if it’s not part of your current plan, you might also want to consider how a limited company could affect the tax due should you sell the property.

Contact us to talk about your mortgage interest rate

While we can’t change government policy around tax deductibles, we could help you secure a competitive mortgage. Securing a mortgage with a lower interest rate may reduce your outgoings and increase your profits. So, seeing what else is available on the market might be valuable. 

Please contact us to arrange a meeting to talk about your mortgage needs. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Your property may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

The Financial Conduct Authority does not regulate buy-to-let (pure) and commercial mortgages.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning or estate planning.