Limited company or personal buy-to-let? Costs, tax and transfers

Individual landlords pay income tax on rental profit and can no longer deduct mortgage interest from rental income, receiving a basic rate tax credit on finance costs instead. A company deducts mortgage interest as a business cost and pays corporation tax on its profit. For higher rate taxpayers with large mortgages, this difference is the main reason companies are used.

Profit taken out of a company as dividends or salary is taxed again in the director's hands, so the overall saving depends on how much profit is drawn and how much is left in the company to reinvest. Tax rates and allowances change, so the comparison is worth checking each year with an accountant.

Mortgages for companies and individuals are similar, but the details differ. Company rent tests often need a lower margin than for higher rate taxpayers borrowing personally, which can support a larger loan. Rates and fees for company borrowers are sometimes a little higher, and legal costs are usually higher because of company documents and personal guarantees.

Fewer lenders offer company mortgages than personal buy-to-let mortgages, though the number has grown. How company lending works is explained on the limited company buy-to-let mortgages page.

Moving a property already owned personally into a company is treated as a sale at market value. Stamp duty at the higher rates is normally due, capital gains tax can be due on any rise in value, and a new mortgage is needed in the company's name, with early repayment charges possible on the old one.

Some landlords who run a genuine property business, rather than a few investments, may qualify for relief on the transfer, but the rules are strict and need specialist advice. Many landlords keep existing properties personally and buy new ones through a company.

A company must file annual accounts and a confirmation statement at Companies House, and a corporation tax return with HMRC. Most landlords pay an accountant to do this, which adds a yearly cost that individual landlords with a simple tax return may not have. Directors also have legal duties to the company.

Company ownership can make it easier to bring in partners or family members as shareholders, and to plan for passing on property, though both need advice.

The choice between personal and company ownership depends on the landlord's tax band, the size of the mortgages, whether profit will be drawn or reinvested, how many properties are planned and the costs of setting up and running a company. Higher rate taxpayers building a portfolio are the group for whom companies are most often considered.

Basic rate taxpayers with small mortgages, or landlords who need the rental income to live on, may gain little. An accountant can model both options on real figures.