So, you’re looking to diversify your portfolio and start investing in buy-to-let (BTL) real estate in the UK? Well, you couldn’t do it at a better time. The UK property market is in a huge period of growth, with investors seeing record returns. With JLL predicting that the BTL market could become the largest living sector in the UK with record values, every investor worth their salt is scrambling to lap up the best properties. However, if you’re only just getting started with your property portfolio, you may be daunted by the costs that come with investing in this asset class before you see any returns. A way to help mitigate these costs is to set up a limited company through which you can buy real estate. Here’s what this does for you and how to get it done!
A limited company is one where the liability of the company’s stakeholders is limited by the amount they invest. What this means is that the potential losses for each person are limited to the amount that said person has invested in the company. This protects a shareholder from having their personal assets seized if the company goes into debt because of normal business. You can set up your company to be limited by shares or by guarantee. When limited by shares, the company is owned by at least one shareholder and managed by at least one director. Likewise, a limited by guarantee company is owned by one or more guarantors and managed by a director.
The key benefit of a limited company is the total separation of the company’s assets and income from those of the shareholders or guarantors. This diminishes the risk to shareholders because, if the company goes bust, they will have only lost what they have put into the company and nothing else. Creditors or stakeholders are unable to claim the owner’s personal assets or income. This is especially beneficial if you are buying real estate through a limited company; any debts accrued as a result of the BTL cannot be transferred to you, making you that much safer from risk. It’s important to note that this does not mean you are absolved of any personal guarantees often required by a mortgage lender. All BTL Mortgage Lenders require Director’s Personal Guarantee.
A key benefit of purchasing BTL properties through a limited company is the improved tax efficiency and planning that it offers. You would pay income tax on any rental income you earned as a private landlord. This can be a problem for those in higher tax brackets, who will have to pay as much as 40% in income tax. This is especially true for investors who may be brought into a higher tax bracket as a result of their rental income. As a result of their investment, they may have to pay more income tax. This means that, in practice, their profits may stay the same or even get worse.
You can solve this problem by securing BTL through a limited company. This means that any profits made become profits of the company and are therefore not susceptible to personal income tax rates. Instead of these, you will be charged a corporate tax, which stands at 19% across the board and has no upper tiers like income tax does. This makes your investment that much more secure and brings you a higher return on your investment than if you had struck out as a private landlord.
Furthermore, a private landlord is no longer able to deduct finance costs (like mortgage interest) from rental income. When you own real estate through a BTL, this is still the case, as you can classify it as a business expense.
Some other key benefits of owning BTL through a limited company are:
This is not to say that a limited company is the best for everyone. Otherwise, everyone would be doing it. It’s important that you speak with a credited accountant before setting up a limited company to make sure that it’s the best option for you. Some of the disadvantages to consider are:
While these are things to consider, it’s important not to let them put you off. A limited company can be an excellent way to capitalise on your real estate investment to the fullest and is certainly something to consider. Speak with your accountant and, if you decide it’s the right choice for you, get the ball rolling! There’s a whole world of investment opportunities out there; don’t let them pass you by!
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