Should you operate your residential property business through a limited company?

Until recently there was little incentive to own a buy-to-let property through a limited company, however the new restrictions on interest start to bite in 2017-18 with their full force being felt in 2020-21.

If we look at the year 2020-21 only and ignore the transition period it is possible to compare the after tax receipts under different scenarios. We have chosen four profit bands and the options of:

  • Keeping the property yourself;
  • Transferring the property to a company and taking all the profit out as a dividend; and
  • Transferring the property to a company and leaving the profits in the company.

In order to keep things a little simpler we have also assumed that the tax-free dividend allowance is not available to any of the taxpayers. As a reminder the basic rate of tax is 20%, the higher rate 40% and the additional rate is 45%.

The after tax receipts are:

Rent before interest £15,000 £30,000 £60,000 £90,000
Interest £(5,000) £(10,000) £(20,000) £(30,000)
Profit £10,000 £20,000 £40,000 £60,000
Property owner
Individual basic rate payer £8,000 £16,000 N/A N/A
Individual higher rate payer £5,000 £10,000 £20,000 £30,000
Individual additional rate payer £4,250 £8,500 £17,000 £25,500
Company dividends paid to a basic rate payer £7,678 £15,355 N/A N/A
Company dividends paid to a higher rate payer £5,603 £11,205 £22,410 £33,615
Company dividends paid to an additional rate payer £5,138 £10,275 £20,551 £30,826
Company retains the profit, no dividends £8,300 £16,600 £33,200 £49,800

There are substantial tax saving to be made from using a limited company to hold property interests, especially if you are a higher or additional rate taxpayer and you do not need to take dividends. Even when taking all the profits of the company out as a dividend the saving can be substantial.

If you are looking to build a property portfolio, then starting out by using a limited company seems a sensible choice at the present time.

If you already have a buy-to-let property, should you be transferring the property into a company?  We will discuss that question in a later blog.

If you need help setting up a limited company or in preparing the tax and accounts for a limited company property letting business, then please give us a call or send us an email.