A limited company, or a company limited by shares, is a corporate entity that is legally separate from the people who own and manage it. A limited company has its own finances, different tax rules and can keep any profits after paying tax. Businesses routinely operate using limited companies in all sectors of the economy.
Impact of Section 24
Before the entry into force of Section 24, most private landlords owned their rental properties directly, in their own name. They were able to offset the mortgage interest and other finance costs (such as mortgage arrangement fees) against their rental income for tax purposes.
Section 24 radically changed the tax treatment of financing costs for individual landlords, by restricting it to a 20 per cent tax credit on interest payments.
This, however, does not apply to landlords who own their properties through a limited company. Companies may still set off all financing costs against their rental income.
Consequently, instead of creating a level playing field for all, George Osborne introduced an imbalance in the market. Landlords who own rental properties themselves are at a disadvantage to corporate landlords, who still have the favourable tax treatment.
Hamptons have estimated that around half of investor purchases in 2021 were bought by a limited company, and that there are now 270,000 buy-to-let companies in operation.
It is possible for an individual to move a buy to let portfolio to a limited company. However, this is costly due to stamp duty and CGT being payable. Instead, many landlords are using companies for new purchases.
For lower-rate taxpayers the benefits of using a limited company for property investment are far more marginal.
This is a complicated area, and it is important to get specialist advice before setting up a limited company for your buy to let investments.
Limited companies – the gov.uk guide to setting up a company.