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Why do property investors use a limited company? Because of tax!

Limited Companies are very popular with property investors. This is because taxes are generally lower. In this article I explain the taxes you pay, and compare them to owning property in your own name. Nearly all investors I work with use a limited company.

In the sections below, I explain why limited company property is so popular:

  • Corporation tax is paid on profits, and is normally lower than income tax
  • Corporation tax is paid rather than capital gains tax. Also normally lower
  • How limited companies can legally avoid inheritance tax in the UK
  • Section 24. Buy to let tax relief mortgage interest
  • How to set up a limited company for property
  • Can I transfer my buy to let property into a company?


Please note that this article is based on my own personal experiences. I am not an accountant and you alone are responsible for your tax decisions. UK limited company property tax and buy to let tax are complex areas. Nothing in this article constitutes buy to let tax advice. You should always get your own tax advice.

Corporation Tax is normally lower than Income Tax

A limited company is a different entity to the individual shareholders. The entity has limited liability. If it makes a loss, then the shareholders aren’t personally liable for those losses.

Corporation tax is paid on profits (rather than income tax). Corporation tax is 19%, and the maximum income tax rate is 45%. Most property investors are high earners and pay income tax at 40% or 45%. By comparison, 19% is very attractive. It’s one reason why limited company property is so popular. UK buy to let taxes can be much lower.

Corporation Tax is normally less than Capital Gains Tax

Do UK limited companies pay capital gains tax (CGT)? People ask that all the time. The answer is no and that’s normally a good thing!

If you own a property in your own name, then you pay CGT when you sell the property. For a higher rate taxpayer, that is equal to 28% of the profit you make (subject to the tax free allowance).

With limited company property, you pay corporation tax when you sell a property. Corporation tax is 19%, which is lower than 28%. This might not seem like a lot, but it is. It makes a massive difference to your buy to let taxes.

The difference between 19% and 28% could be huge. Assume you buy a property for £200,000 and sell it for £500,000. You have made £300,000 profit. Inside a limited company, you would pay £57,000 in taxes. Outside a limited company, you would pay £72,000 in tax. You would save a massive £15,000 inside the limited company.

Limited companies are exempt from Section 24

Section 24 is a massive buy to let tax rise. Thankfully, limited company properties are exempt from it. I wrote a separate article on Section 24, that goes into detail. I also summarise the details below.

Section 24 is all about buy to let tax relief for mortgage interest. It states that mortgage interest costs are no longer an allowable expense. So we can’t net it against rental income for tax.

You can’t net mortgage interest costs against rental income, but you do get a basic rate credit. The calculation is rather cumbersome. The net effect is as follows:

  • Higher rate taxpayers with a mortgage will pay more income tax
  • Some basic rate taxpayers will become higher rate taxpayers under the new rules
  • Some landlords could make a loss on a property, and still pay income tax!

Here’s an example of UK buy to let tax under Section 24:

  • James earns £60,000 from his job and is a higher rate taxpayer
  • He also owns a buy to let with £10,000 of rental income, £4,000 of mortgage interest costs, and £2,000 of other costs
  • James will pay 40% tax on £8,000 (£10,000 - £2,000). This equals £3,200
  • He’ll get a basic rate credit of 20% * £4,000 = £800
  • The net tax he will pay is £3,200 - £800 = £2,400


Here’s what happens if James owns the property inside a limited company. A massive tax cut:

  • Recall that the property has £10,000 of rental income, £4,000 of mortgage interest costs, and £2,000 of other costs
  • The profit is £4,000
  • Net tax he will pay is £4,000 * 19% = £760

Inside the limited company, James reduces his tax burden by 68%. If James has other properties, then over the years, he’d save hundreds of thousands in tax.

Buy to let tax relief for mortgage interest is one of the dullest subjects imaginable! But thanks to section 24 tax, we now all need to be experts in it!

Less Inheritance Tax

Limited company benefits are extensive. They’re not confined to buy to let tax relief for mortgage interest, or low tax rates.

Questions about how to avoid inheritance tax in the UK are common. Inheritance tax stands at 40%. So 40% of your lifetime assets (minus tax free allowance) would go to the UK Government. You really don’t want that! Proper tax planning is essential to leave your legacy intact.

There are many strategies to avoid inheritance tax in the UK. You should get advice from your tax advisor, on the best strategy for you. If you don’t have one, I provide the details of my one below.

It’s far easier to reduce inheritance tax, if you have limited company property. One popular strategy is to set up freezer shares and growth shares, in your company. This is an advanced area of tax planning and you’d need a specialist to set this up for you. Your accountant won’t be able to do this!

I’ll briefly cover the strategy below. If you want to set up freezer shares in your company, then speak to Cotswold Barristers. Set up a call here. They’ve helped hundreds of landlords and are hugely experienced in this area.

An ordinary limited company has only one type of share. However, you can set up different types of shares, with different rights. Different types of shares could be share A, share B, share C etc.

  • A share with a voting right can make decisions on behalf of the company
  • A share without a voting right has no influence on the direction of the company
  • A share with capital rights, increases in value as the company increases in value. So if the value of the company doubles, then the value of the shares will also double. These are called growth shares
  • A share without capital right is called a freezer share. It will never increase in value, regardless of the value of the company
  • A share with a dividend right can receive a dividend. A share without a dividend right cannot receive a dividend

Below is an example of how freezer shares can avoid UK inheritance tax.

  • A company is worth £100,000
  • Class A shares have a voting right, but no capital right. They are worth £100,000. The value of these shares has been frozen at £100,000 and will never increase
  • Class B shares have capital right, but no voting right. These are called growth shares


Let’s say the company increases in value from £100,00 to £2million. If the company is sold, then the holders of class A shares will get £100,000 and the holders of class B shares will get £1.9million.

The value of class A shares is £100,000. The value of class B shares is £1.9million right? Well no it’s not. Class B shares don’t have a voting right. So the holders of those shares can’t make any decisions on behalf of the company. They can’t sell the company. They can’t decide the dividend to pay to shareholders. So if you tried to sell class B shares, the value would be far less than £1.9million. Nobody would buy the shares, as they could never make any decisions for the company.

Because the value of the class B shares would be far lower than £1.9million, less inheritance tax would need to be paid upon death.

How to set up limited company for property

If you’ve read to this point, you know the amazing benefits of buy to let in a limited company. You’ve seen how to legally avoid inheritance tax in the UK. You’ve seen how to use the Section 24 tax loophole.

But how to set up limited company for property? This is another common question, and the answer is super simple!

You set up a limited company as normal, but with a SIC code that is specific to property. A SIC code defines the main activity of a business. It’s important to choose the right SIC code for a property business, or you’ll struggle to get a mortgage. Mortgage lenders don’t like it when a company does lot of things. They want to see that the company is only involved in property.

Some common property SIC codes are given below

  • 68209 is Other letting and operating of own or leased real estate
  • 68100 is Buying and selling of own real estate


I highly recommend that your accountant sets up your company and does your accounts for you. The majority of property investors use an accountant. You do meet the odd person that does their own accounts, but in my view this is insane. A good accountant will save you money with their knowledge.

Can you transfer your properties into a company?

So you’ve read how to set up a limited company for property. But what if you already own property in personal name?

Can I transfer my buy to let property into a company? This is a very popular question. Maybe your old home is now a buy to let. Maybe you inherited properties and own them in personal name. Can you transfer them to a limited company? Can you use limited companies to avoid UK inheritance tax and reduce section tax 24 burden?

This is where things get complex! You can transfer your properties into a limited company, but you might get whacked with tax. Capital Gains Tax and Stamp Duty can easily run into hundreds of thousands of pounds.

There are strategies to transfer properties into a company – tax free. I cover these strategies in this article. This is an advanced area of tax planning, and you’ll need to use a specialist.

Conclusion

Which is better, sole trader or limited company? You need to make that decision for yourself!

In this article, I’ve shown why limited Companies are so popular with property investors. I’ve explained the massive tax savings that can occur inside a company. I’ve explained how to set up a limited company and how to transfer properties into a company – tax free. I’ve also answered if limited companies pay capital gains tax – they don’t! Properly applying these techniques can save investors hundreds of thousands over a lifetime.

If you want to learn more about taxation, I’ve written a bunch of other great articles.

UK Buy to let tax in a limited company is a complex area. Nothing in this article constitutes buy to let tax advice – I’m not an accountant. I’m just providing details about my own experiences. You can use limited companies to avoid inheritance tax in the UK. You can use limited companies as a Section 24 tax loophole. But those decisions are your own, and you should always get your own advice.

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