Tax can be tricky.

While it’s important to pay what you need to, it makes no sense to pay more than that. And, in fact, your tax liability can be the difference between profit and loss for your investment. So, quite literally, it pays to be tax-efficient.

That’s why we’ve written this handy series – to help you learn easily, invest confidently, and finally feel tax-triumphant.

The tax benefits of a limited company

Done properly, investing through a limited company can be far more tax-efficient than buying to let in your own name. Here’s a few reasons why:

1. Deduct your mortgage interest, pay less tax

When you invest through a limited company, you can deduct your mortgage interest payments from your rental profits – pre-tax. That means you’ll pay less corporation tax, as your profits will be lower. Here’s a quick example:

Say your rental income is £1,000, and your mortgage interest payments are £150. You can deduct the £150 from the £1,000, and only pay tax on the £850 that’s left. Plus, you’ll only pay Corporation Tax on that – a mere 19% on a portion of your profits, in many cases up to £50,000.

If you invested in your own name, on the other hand, you’d pay up to 45% in Income Tax on all your profits – with only a 20% tax credit on your interest payments. If you’re on the Higher tax band, here’s what that would save you:

That’s an extra £2,718* you’ll save over the course of a year –all because you invested through a company, and paid Corporation Tax rather than Income Tax.

*This would be higher if those profits were taken as pension contributions. More on this in a second.

2. Extract your profits, for less

An investment is only any good when you can realise it. That is, you’re able to easily extract your profits. And that’s the great thing about investing through a limited company – it gives you the flexibility to access your earnings in a way that suits you – all tax-efficiently.

Here are three ways you can take profits out of your BTL business, all while saving on tax:

Dividends
For UK taxpayers, there’s a £2,000 tax-free allowance on dividends – per shareholder, per year.
Owner/Director loan repayments

When you invest in buy-to-let through a company, you loan your business that money. So it can pay you back from its profits, without triggering an Income Tax liability. Most investors take their tax-free dividend first, before extracting the rest of their profits as loan repayments.

Pensions

If you contribute to a pension through your limited company, it’s considered a business expense. That makes it deductible from your profits – much like your mortgage interest payments. This reduces the amount of Corporation Tax you’ll pay overall.

All of this is only possible when you invest through a limited company.

3. Save when you sell

If you invest through a company, you won’t be selling a property when you sell. You have the option to sell shares in the company that owns that property. 

And, when you sell shares as a UK taxpayer, you pay Capital Gains Tax at 10 or 20% on the increase in their value since you owned them (depending on your Income Tax band). If you bought in your own name initially, you’d pay up to 28% on any increase in value when you came to sell.

Plus, when your buyer purchases the shares in your company, they’ll only pay 0.5% in Stamp Duty on the value of the shares – rather than SDLT on the whole value of the property. This could save them thousands, giving you a price advantage: because they won’t pay such a large Stamp Duty bill, you can afford to bump up your asking price – effectively splitting the difference. You’ll earn more, and they’ll pay less. Win-win.

Bonus: inheritance!
Your beneficiaries could also benefit from a limited company structure. With a limited company, you could gift 99% of the shares in that company to a beneficiary. Then, provided you do this seven years before you pass away, they’ll inherit the remaining 1% – and only pay Inheritance Tax on that 1%. That means a fraction of the tax they’d expect to pay if they inherited the property outright.