When you buy a rental property, you need to decide how to own it. You can buy it in your own name. Or you can set up a limited company and buy it through that. Both options have good points and bad points. This guide covers the key facts so you can pick the right route for you.

Tax rules can be hard to follow and they change often. Always speak to a trained tax adviser before you decide.

Ltd vs personal: what’s the difference?

When you buy in your own name, you own the property as a person. Any rent you earn is added to your personal income and taxed. When you sell, you may pay capital gains tax on any profit you make.

When you buy through a limited company, the company owns the property. The company pays tax on its profits. You then take money out as a wage or dividend. This changes how you are taxed and when.

The right choice depends on your tax position, how many properties you own, and your long-term plans.

Examples of tax paid on investment property

Here is a simple example to show how the two options compare.

Say you earn £45,000 a year from your job. You also make £10,000 a year in rental profit.

  • As a person: Your rental profit is added to your wages. This pushes some of it into the higher tax band at 40%. You could pay up to £4,000 in tax on that £10,000.
  • Through a limited company: The company pays tax on the £10,000 profit. The rate is 19% for small profits. That works out at £1,900. This is less than the personal route.

But if you want to take that profit out of the company for personal use, you pay more tax on top. So, think about what you plan to do with the money.

Buying property personally

Buying in your own name is the simpler route. There is less paperwork and it costs less to set up. It is also easier to get a mortgage. Most buy-to-let lenders offer loans to people, so you have more choice.

The main downside is tax. Since 2017, landlords who own property in their own name cannot deduct all their mortgage interest before paying tax. Instead, they get a tax credit worth 20% of their interest. This means higher rate taxpayers often pay more tax than they would through a company.

Buying in your own name may work well if you are a basic rate taxpayer, you own one or two properties, or you plan to sell soon.

Buying property in a limited company

More landlords are now using a limited company to hold their rental properties. This is most common for those who own several properties or pay higher rate tax.

A company is a separate legal body. It files its own accounts and pays its own tax. It can also deduct all of its mortgage interest as a cost before working out its profit. This is a key tax benefit over personal ownership.

Many landlords use a Special Purpose Vehicle, or SPV. This is a company set up just to buy and rent out property. Lenders often prefer this type of company when offering limited company buy-to-let mortgages.

Advantages of buying property through a limited company

Improved tax savings and planning

A company can deduct mortgage interest in full as a business cost. It also pays a lower rate of tax than many individuals. This can make a big difference if you pay the higher or top rate of income tax.

More financial choice

Inside a company, you can choose when to take profits out. If you leave money in the company and put it back into the business, you only pay company tax. You only pay personal tax when you take money out. This gives you more say over your tax bill each year.

Portfolio expansion

If you want to grow a portfolio of rental homes, keeping profits inside a company can help you buy faster. You pay less tax on money that stays in the business. So more of your rental income can go towards your next purchase.

Passing property to family

Shares in a limited company can sometimes be passed to family members more easily than property held in your own name. This can make passing on wealth simpler. But the rules are hard to follow, so always get expert advice.

Disadvantages of buying property through a limited company

No capital gains tax allowance

People get a capital gains tax (CGT) allowance each year. This means you can make a certain amount of profit from selling a property before you pay CGT. Companies do not get this allowance. All gains made by a company are subject to tax. This can make it more costly to sell a property held in a company.

Dividends and double taxation

If you want to take profits out of your company, you will usually do this as dividends. Dividends are taxed as personal income. This means the profit is taxed twice. Once when the company earns it. And again, when you take it out. If you need regular income from your properties, personal ownership may work out better.

Mortgage rates and choice

Fewer lenders offer buy-to-let mortgages to limited companies. The deals that are on offer can also come with higher rates and fees. This means your borrowing costs may be higher. It is worth speaking to a mortgage adviser who has access to a wide range of lenders, including specialist ones.

More admin and record keeping

Running a limited company takes more work. You need to file company accounts each year. You must submit a tax return for the company. You also need to keep clear records and sign up with Companies House. Many landlords pay an accountant to help with this. These costs can add up, most of all if you only own one or two properties.

Read our guide: What is a buy-to-let mortgage?

How can Pepper Money help with your buy-to-let mortgage

At Pepper Money, we work with landlords at all stages of their property journey. Whether you are buying your first rental home or adding to your portfolio, we can connect you with a broker who can help you find a buy-to-let mortgage that works for you.

We know that not every landlord fits the standard profile. If you have had credit issues in the past, or if your income is not straightforward, a broker from our network may still be able to help. Find a broker to get started.

Final thoughts

Choosing between personal and limited company ownership is not a simple call. It depends on your tax position, your future plans, and how many properties you own or want to own.

For many higher rate taxpayers with large portfolios, buying through a company can save a lot of tax. For those with just one or two properties, the extra costs and admin may not be worth it.

The best step is to speak to a tax adviser and a mortgage expert before you decide. If you would like to explore your options, find a broker who can guide you through the next steps.