Should I register as an LLC to buy a house?

In recent years, there has been a surge in people registering as limited liability companies to acquire buy-to-let properties. We explain what an LLC is and how setting one up could help you save on tax as a landlord.

In the past, ownership of a buy-to-let property tended to be the province of individual investors, but buying a house as a business has become increasingly common.

There are now more than 309,000 buy-to-let companies in the UK, up from a little under 229,000 at the end of 2020, according to estate agency Hamptons.

But what exactly is behind this rise in landlords purchasing property using a company?

Here we take a closer look:

Read more: Is becoming a landlord still worth it?

Two ways of owning a buy-to-let property

One of the main differences between owning a  buy-to-let property as an individual or a business is the type of tax you pay on the rental income you receive from tenants.

So for example:

• If you can own a buy-to-let property as an individual, you are liable for income tax on the rent. You pay tax at your marginal rate, so if you’re a basic-rate taxpayer then you will pay at a rate of 20%. But taxpayers on the higher rate have to stump up 40%, while those on the additional rate pay 45%.  
• If you buy a property as a limited company, however, you pay corporation tax on the rental income. The rate of corporation tax is currently 19%, but will rise to 25% from April.

As the rate of corporation tax is lower than income tax – at least, in terms of significant savings, for people in the top tax bands – this has prompted many landlords to buy property within a company structure. 

It is not just about the disparity in tax rates, however, because rule changes have also played a big part. Landlords used to be able to bring down their income tax bill by deducting their mortgage interest payments from the rental income and paying tax on the reduced balance.

However, this relief was gradually phased out and replaced in April 2020 by an across-the-board 20% tax credit on mortgage interest (see below).

What is an LLC?

As a landlord, you can opt to own property as part of a limited liability company.

Changes to the tax rules – and specifically to the mortgage tax relief rules – have encouraged a growing number of property investors to purchase rental properties through companies. We explain the tax rule changes in the next section.

At the same time, more parents are opting for this ownership structure as part of the house-buying process to help children onto the property ladder. This was almost unheard-of a few years ago.

For some, starting a limited company may be a more tax-efficient option than buying a house as an individual, although not everyone will benefit.

How to register as an LLC to buy a house in the UK

To set up a limited company, you need to register it with Companies House. This costs £12. You also need to register with HM Revenue & Customs for corporation tax.

This also applies if you want to switch from owning property privately to owning as part of a company.

But be aware that moving ownership of a property to a limited company is treated as a property sale. This means you will face stamp duty, including the 3% surcharge for second homes and buy-to-let properties introduced in April 2016.

You might also have to pay capital gains tax if the house or flat has gone up in value by more than £12,300 since you originally bought it. The capital gains tax threshold will fall to £6,000 from April, which means more people will be liable for it.

There are also additional costs when incorporating, such as legal fees, and you will face ongoing expenses associated with filing annual accounts and corporation tax returns with HMRC.

How have the tax rules changed?

Before April 2017, individual landlords could deduct all of their mortgage interest payments from their rental income before their tax was calculated. 

But this was gradually phased out so that landlords could only deduct some of the interest. By April 2020, they couldn’t deduct any.

Instead, they now get a tax credit based on 20% of their mortgage interest – in effect, a discount on their tax bill. But even with a 20% tax credit, that’s half of what a higher-rate taxpayer would have been able to claim before the tax rules changed.

Sid Agarwal, senior tax manager at the consultancy DNS Tax, says the change has left many landlords paying higher rates of income tax. For many, he added, it has also reduced the cashflow from their property portfolio.

But that’s not the only tax change to affect landlords:

• The stamp duty surcharge on the purchase of additional homes was introduced in April 2016. This tax can add thousands of pounds to the cost of buying a property.
• Since 2018 landlords have been required to make sure that the homes they let out have an energy performance certificate (EPC rating) of E or above. It has led to some landlords needing to spend hundreds or even thousands of pounds to make sure their properties comply with the rules
• From April 2025, any newly-let property in the private rental sector will need an EPC rating of C or above

Some critics say these changes are to blame for landlords deciding to sell up and leave the market, causing a shortage of rental properties.

Will setting up an LLC reduce the amount of tax I pay?

To keep down their tax liability, it has become increasingly common for landlords to set up a limited company to buy properties.

Marc von Grundherr, director of estate agent Benham & Reeves, says: “The advantage of this structure is that limited companies may offset their mortgage interest costs directly against their income.”

This is because mortgage interest is still classed as a business expense for companies. Not only does this mean that landlords can deduct all of their mortgage interest from the rental income they receive, but the rates of tax they pay might be lower too. An individual landlord’s usual rate of income tax applies when HMRC calculates what they owe on their rental income, but set up as an LLC and the rent earned through a company is subject to corporation tax.

In the current tax year, corporation tax is charged at a rate of 19%. This is lower than the basic rate of income tax, which is 20%.

The rate of corporation tax is set to rise to 25% in April. But that’s still lower than the 40% or 45% rate of income tax paid by top earners.

We explain how much you have to earn to be in a higher-rate tax band.

The pros and cons of buying property through a company

Before taking the plunge, you need to work out whether buying a property through a company is right for you.

What are the pros of buying through a company?

Here are four main advantages of buying a buy-to-let property through a company.

1. More tax efficient

Forming a new corporation can often be more tax-efficient given the tax breaks for buy-to-let landlords.

Companies can deduct mortgage interest from their rental income. They also pay a lower rate of tax on the profits compared to individual landlords.

2. Rental income requirements are lower

To get a buy-to-let mortgage, you’ll need to pass certain affordability checks. One of these is the amount you’ll earn in rental income in comparison to what your monthly mortgage repayments will be.

If you are a higher-rate taxpayer, the minimum rental income required is 145% of your monthly mortgage payments.

If you set yourself up as a limited company (or are a lower-rate taxpayer), the typical rental cover you’d need to earn would be just 125% of your monthly mortgage repayments.

3. Banks may lend bigger amounts

“Mortgage firms will typically lend larger amounts based on rental income for limited companies versus personal owners,” according to Jed Newton of mortgage broker Trinity Financial.

What are the cons of buying through a company?

While setting yourself up as a limited company may sound persuasive, there are some downsides.

1. Mortgages could be harder to come by and more expensive

The number of buy-to-let mortgages available for limited companies may be lower than for individuals. You may also find rates are steeper.

Howard Levy from mortgage broker SPF Private Clients, said many lenders don’t offer mortgages for this type of landlord.

With that said, more lenders have started to do so, and as a result, interest rates are coming down.

In January, the average rate on a limited company mortgage was 6.56 per cent. This compares to 6.24 per cent for a standard buy-to-let deal. Hefty arrangement fees are another potential downside to watch out for.

2. Other costs

Setting up a company and selling your property could trigger stamp duty and capital gains tax. There may also be mortgage and valuation fees to pay.

For some landlords, these costs make switching to an LLC prohibitive.

3. More paperwork

Running a limited company requires extra admin and paperwork.

You may also have to pay higher accountancy costs to help you file your annual company accounts.

Agarwal from DNS Tax said companies have higher compliance with tax authorities compared to individual landlords, which can result in higher accounting fees.

How to work out the right option for you

Not every landlord will benefit from setting up a limited company. If you are only ever likely to rent out one or two properties, going down this route might not make sense given the administrative burdens and costs.

But if you have a portfolio of properties, or if you’re a higher-rate taxpayer, there are likely to be benefits.

Agarwal said: “Buying through a limited company is not suitable for everyone. It depends on your personal circumstances and long-term objectives.”

The key is to do the maths to work out whether starting an LLC will reduce your tax bill – and whether the long-term tax savings outweigh initial and ongoing paperwork and costs.

Just how much tax can you save by holding property through a company?

To understand the stark difference, Agarwal gives the example of John, who is a higher-rate taxpayer.

John has an annual income of £70,000, so he pays tax at a rate of 40%. He’s looking to buy a property for £450,000 and rent it out. The property is expected to produce a gross annual rental income of £18,000.

His two options are below.

Option one: buying the property as an individual

The interest that John has to pay on his mortgage is £14,175 over a year. This is on the basis that he borrows at 70% loan-to-value with a mortgage rate of 4.5%.

John is earning £18,000 in rental income but he’s paying income tax at a rate of 40%, leaving him with £7,200 that will be subject to tax.

But he also gets a 20% tax credit discount. This is based on 20% of the £14,175 interest he pays on his mortgage. In other words he gets a discount of £2,835.

So the amount of tax payable to HMRC is £7,200 minus £2,835, which leaves him with a tax bill of £4,365.

John deducts the mortgage interest of £14,175 and the tax bill of £4,365 from his rental income of £18,000, which means he is left with minus £540.

This leaves him out of pocket, so he will need to pay the tax from other sources of income.

Option two: buying the property through a company

John speaks to his tax adviser who recommends he sets up a limited company to purchase the property.

With the limited company, John has the same annual rental income of £18,000. But this time, because of the narrower range of mortgage products for limited companies compared to individuals, the mortgage rate is higher at 5%. This takes the interest payments up to £15,750.

His profits for the company are calculated by deducting his interest from the rental income. So £18,000 minus £15,750 leaves a profit of £2,250.

The profit of £2,250 will be subject to corporation tax at 19%, meaning he has to pay tax of £428.

By deducting this tax from the profit, this leaves John’s company with a net profit of £1,822.

So this means that rather than losing £540 as he would with personal property ownership, the company structure gives him a gain of £1,822.

With that said, John might incur other additional costs from owning the rental property through a company that could wipe out the gains.

Get advice to help you make a decision

Incorporating on any scale is a specialist area. It’s well worth seeking professional advice from a qualified tax expert or accountant who can help you evaluate your options.

Making the wrong decision could be costly.

If you do decide to go ahead, a tax adviser can help you set up the company.

You should also involve your mortgage broker, as well as a solicitor who has experience in this area.