Owning properties through a limited company can, however, be an effective way to reduce your tax burden. That’s because you pay corporation tax on company profits, and this is charged at a lower rate than the higher rate of income tax (at 40 percent) and the additional rate of income tax (at 45 percent).
Even so the main rate of corporation tax, which is applicable to profits of more than £250,000, rose from 19 percent to 25 percent in 2023. But a small profits rate of 19 percent is still charged on companies with profits of £50,000 or less. And a sliding rate of corporation tax is payable on profits between £50,000 and £250,000.
You should also be aware that, if your company is paying you a personal income, then you could have to pay both corporation tax and income tax. That said, your income would reduce the company’s corporation tax bill, so there is some offsetting here.
Getting your company to pay into a pension scheme for you, out of your income from the company, could offer a potential tax benefit. This is because company pension payments are a tax-deductible expense. So they could reduce your company’s corporation tax liability and employer’s national insurance payments, which might benefit you as a company owner. But HMRC must consider these company pension contributions to be ‘reasonable’.
There are, though, some disadvantages to owning properties through a company. In particular, mortgage rates are typically higher for property owning companies than for individual property owners. You may also have to pay for accountancy services, which might not be necessary for personal property owners.
Moreover, a company can potentially pay higher stamp duty land tax rates on property purchases than an individual owner. This is charged at 15 percent for companies buying residential properties costing more than £500,000, but various reliefs are available depending on what the property is used for (1).
Companies with residential property worth more than £500,000 may also be liable to the annual tax on enveloped dwellings. Properties liable for this tax are revalued every five years and the charge is applied annually. The tax charge varies in line with the valuation band the property falls into, and the charge is higher for higher value bands (2).
So you need to exercise judgement when deciding whether to own buy-to-let properties as an individual or a company and you may want to seek specialist advice here. Even if you do get a tax saving from running a buy-to-let property company, this could be more than offset by higher mortgage interest payments and other costs.
