Owning and renting out property can provide a useful (and hopefully reliable) monthly income stream. Your asset should also grow in value, offering a handy nest egg when retirement rolls around.

But whether you’re a long-established landlord with a substantial portfolio or you’re new to the landlord game with a single buy-to-let property, there’s a lot to think about. The biggest considerations are paying tax as a landlord, and the legal structure you’ll use to rent out your property (or properties).

One question we get asked a lot is whether it’s better to own a buy-to-let or other property as a sole trader or to set up a company which owns it (sometimes known as a Special-Purpose Vehicle company, or SPV).

We look a little deeper into the options available for sole traders and limited companies to help you figure out the best way forward. It’s not a case of one size fits all!

What is a Special-Purpose Vehicle Company?

As far as HMRC and Companies House are concerned, a Special-Purpose Vehicle (SPV) company is the same as any other limited company that you set up (a process known as incorporation).

 
This is because lenders want to reassure themselves as much as possible that the company is financially ‘safe’, and focuses on property (the bit that your mortgage lender is interested in), rather than any other business activities on top of that. Adding other activities in to the mix might make your company seem like more of a financial risk.

What’s the difference between owning property as a limited company and being a sole trader?

Renting out a house, flat, or other property through a company means it’s the limited company which receives the rental income, and therefore the company which pays tax on that income – in the form of Corporation Tax. To take any of that income out of the business for yourself then you’ll normally either pay yourself a salary as an employee of the company, pay yourself dividends, or a tax efficient combination of the two.

If you own the property personally as a sole trader, then there’s no distinction between you and the business. This means you’ll submit Self Assessment tax returns and pay income tax on all of the income that the business receives from renting out the property, regardless of whether or not you take any of it for yourself.
 

What are the benefits of creating a limited company for my property?

Like most business decisions, deciding to own and rent out property through a limited company boils down to tax efficiency although there are other pros and cons too.

Offsetting mortgage interest against income

Limited companies are allowed to claim tax relief on mortgage interest, and offset it against any profit they make from rental income. This reduces the amount of profit, and therefore lowers their tax bill, because businesses pay Corporation Tax on their profits, not on income.

 
So, owning the property through a limited company means you may be able to make a saving against the typical income tax rates paid by sole traders or partnerships.

Paying yourself from your property portfolio

By setting up as a limited company, you’re also giving yourself a much more flexible range of options when it comes to taking money from your property business.

These days, most company owners pay themselves using a mixture of salary and dividends which we mentioned earlier. Doing it this way means you’re still ‘paying into the system’ and therefore protecting your state pension and access to other benefits, whilst minimising your tax burden.

If you’re a sole trader, you’ll personally pay income tax on all the profits that the business makes, unlike a company owner who only pays tax on the money they take out of the business.

Personal liability

Renting out your property as a company brings all the usual advantages of limited liability. So, if you were to hit financial trouble, as a company director you wouldn’t need to worry about selling your own house, car, or other personal assets. These would still be at risk if you were a sole trader.

BTL properties and capital gains tax

If an individual disposes of an asset, they’ll pay Capital Gains Tax (CGT) on the profit, or ‘gain’, that they make from doing so, with special Capital Gains rules in place for properties. Companies don’t pay CGT, because they pay Corporation Tax on any profits that they make instead.

If you’re looking to grow your property portfolio, such as acquiring more buy-to-lets, then owning them through a limited company could help you do so more quickly. This is because not paying CGT puts more of the earnings back into the business, giving you a handy leg up in expanding your property portfolio faster.

It’s a bit of a minefield which is why we always recommend talking to our team about the tax benefits of operating as a sole trader versus a limited company. We’ll look at your individual circumstances to offer tailored advice.

Why should I be cautious about renting out property through a limited company?

Taking the “company route” sounds like a no-brainer, and for many it is. But there are still some very valid reasons as to why you might choose not to incorporate your business. Whilst incorporation will reduce your personal liability, it will also bring with it a whole host of new responsibilities and statutory requirements.
 

The responsibilities that come with owning a limited company include:

• Registering with Companies House
• Keeping accurate, up-to-date company records
• Preparing and filing articles of association
• Filing compliant annual accounts
• Submitting a Company Tax Return to pay Corporation Tax
• Reporting any changes, for example if your name or address changes

It involves a fair amount of bureaucracy and paperwork, which takes time and effort. It’s all pretty routine and shouldn’t put you off, but it can be daunting, so it’s a good idea that you take professional advice along the way.

Note too that limited company directors are legally required to publish their name and address which some landlords find off-putting – particularly if they’re renting out properties as a side-line to a separate career, which is often the case if you’re an ‘accidental’ landlord.

If you’re looking to buy a property in order to rent it out and need to get a mortgage, then you’ll need to tackle the issue of actually getting a buy-to-let mortgage for a limited company too. Although such products exist, they are often known for having less favourable terms than those for people who are operating as a sole trader, or who can show that they’re an SPV, like we discussed earlier.

In many cases, the savings you make on tax will adequately cover any extra mortgage costs, so it’s still worth doing – but think about it carefully and let us run some numbers for you first.

So, what are the advantages of renting out a property as a sole trader?

While there are benefits to renting out a property as a company, there are some downsides. Depending on how you feel about these downsides may mean you decide to operate as a sole trader. For example:

• Obtaining a buy-to-let mortgage as a sole trader can be much easier, although there’s still the usual hoops to jump through including fees and affordability
• Switching to a limited company incurs its own costs, and you’ll need to pay tax on any money you pay yourself out of the company
• Operating as a sole trader means you simply keep the profits that you make, so you can access your funds more quickly and easily

Can I transfer property ownership in and out of the company?

If you already have a portfolio of several properties and you’re looking at transferring them to your new limited company, you could get stung by property tax (which varies depending on where your property is), as well as Capital Gains Tax.

• England and Northern Ireland – Stamp Duty Land Tax (SDLT)
• Scotland – Land and Buildings Transaction Tax (LBTT)
• Wales – Land Transaction Tax (LTT)

The two different types of tax kick in because you’re expected to “sell” your properties to your company at a reasonable (market) price. So, you, as an individual, could well be burdened with CGT while the company must pay the property tax (such as stamp duty, or land transaction tax).

Again, the long-term tax savings may well make this a good option – but it’s essential you do your homework.

I’m based abroad. What does this mean for setting up a UK limited buy-to-let company?

If your main residence is overseas and you want to invest in UK property, you’ll need to look even more closely at the challenges.

Unfortunately, a limited company won’t mitigate the property tax surcharge if you’re a non-UK resident. It’s a rule that only came into effect recently, increasing the tax which foreign property owners must pay. Many investors from overseas also often report difficulties with getting decent mortgage rates from UK lenders.

 
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