Ltd Company BTL Calculator

## Personal vs Limited Company BTL Ownership: A Complete Tax Comparison Guide

The decision between holding buy-to-let properties personally or through a limited company is one of the most significant choices UK landlords face. Since Section 24 fully phased in during April 2020, this decision has become even more consequential, particularly for higher rate taxpayers. This comprehensive guide explains the tax implications of each structure and helps you determine which approach maximises your returns.

### Understanding Section 24: The Game-Changer for Landlord Taxation

Section 24 of the Finance (No. 2) Act 2015, often called the "Tenant Tax" or "Landlord Tax," fundamentally changed how individual landlords are taxed on rental income.

Before Section 24 (Pre-2017): Individual landlords could deduct mortgage interest as an expense before calculating taxable profit, just like any other business expense.

After Section 24 (Fully Implemented April 2020): Individual landlords can no longer deduct mortgage interest from rental income. Instead, they receive a 20% tax credit on mortgage interest costs. This effectively means:

- Basic rate taxpayers (20%): Largely unaffected, as the 20% credit matches their tax rate - Higher rate taxpayers (40%): Pay 40% tax on rent, but only get 20% credit on mortgage interest - effectively paying an extra 20% tax on mortgage costs - Additional rate taxpayers (45%): Pay 45% tax with only 20% credit - an extra 25% tax on mortgage costs

The Section 24 Tax Calculation:

For a higher rate taxpayer with £15,000 rental income and £8,000 mortgage interest:

*Pre-Section 24:* - Taxable profit: £15,000 - £8,000 = £7,000 - Tax @ 40%: £2,800

*Post-Section 24:* - Taxable profit: £15,000 (no mortgage deduction) - Tax @ 40%: £6,000 - Less 20% credit on £8,000: -£1,600 - Net tax: £4,400

This represents £1,600 additional tax - a 57% increase despite no change in actual income.

### How Limited Companies Are Treated Differently

Limited companies remain unaffected by Section 24. They can fully deduct mortgage interest as a business expense before calculating corporation tax.

Corporation Tax Rates (2024-25): - Profits up to £50,000: 19% (small profits rate) - Profits £50,000-£250,000: Marginal relief (effective 26.5%) - Profits over £250,000: 25%

Most individual BTL companies fall into the 19% band, making the effective tax rate significantly lower than higher rate personal income tax.

### Step-by-Step Comparison Calculation

Scenario: £1,200/month rent (£14,400/year), £8,000/year mortgage interest, £2,000/year operating costs. Landlord is a higher rate taxpayer.

Personal Ownership: 1. Gross rental income: £14,400 2. Less operating costs: £2,000 3. Taxable rental profit: £12,400 (mortgage interest NOT deductible) 4. Income tax @ 40%: £4,960 5. Less Section 24 credit (20% of £8,000): -£1,600 6. Net tax payable: £3,360 7. Net income after all costs: £14,400 - £8,000 - £2,000 - £3,360 = £1,040

Limited Company (dividends extraction): 1. Gross rental income: £14,400 2. Less operating costs: £2,000 3. Less mortgage interest (fully deductible): £8,000 4. Taxable profit: £4,400 5. Corporation tax @ 19%: £836 6. Profit after corp tax: £3,564 7. Dividend tax on extraction @ 33.75% (higher rate): £1,203 8. Net income after all costs: £4,400 - £836 - £1,203 = £2,361

Annual Benefit of Ltd Company: £1,321

### The Complete Picture: Additional Costs and Considerations

While the tax comparison often favours limited companies for higher rate taxpayers, several other factors affect the decision:

Ltd Company Costs: - Formation costs: £50-500 (DIY vs accountant-assisted) - Annual accounts: £500-1,500 per company - Confirmation statement: £13-40 annually - Bank account fees: £5-30/month - Company secretary services: £100-300/year (optional)

Total ongoing costs: £600-2,000/year

Ltd Company Mortgage Implications: - Higher interest rates: Typically 0.5-1% premium over personal BTL rates - Larger deposits: Often require 25-30% vs 20-25% for personal - Fewer products: Limited lender choice - Personal guarantees: Usually required regardless

On a £200,000 mortgage, a 0.75% rate premium = £1,500/year additional interest.

### When Ltd Company Ownership Makes Sense

Ideal Candidates for Ltd Company BTL:

1. Higher/additional rate taxpayers with significant mortgage debt 2. Portfolio builders planning multiple properties 3. Landlords not relying on rental income (can leave profits in company) 4. Long-term investors not planning to sell soon 5. Couples where one is basic rate (can receive dividends tax-efficiently)

Likely to Benefit: - Mortgage interest > 50% of rental income - Marginal tax rate 40%+ - Portfolio of 3+ properties or planning expansion - Can afford accounting costs relative to portfolio value

### When Personal Ownership Makes Sense

Stick with Personal Ownership if:

1. Basic rate taxpayer - Section 24 doesn't significantly impact you 2. Low mortgage debt - little or no interest to lose deductions on 3. Single property - company costs may exceed tax savings 4. Need income now - extracting profits from companies incurs additional tax 5. Planning to sell - CGT rates and reliefs differ between structures

Rule of Thumb: If annual tax saving is less than £1,500-2,000, company costs and complexity may not be worthwhile.

### Profit Extraction: Getting Money Out of Your Company

One of the key considerations is how you'll access your rental profits. Options include:

Dividends (Most Common): - No National Insurance - Taxed at 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate) - £1,000 dividend allowance (2024-25) at 0% - Flexible timing - can leave profits in company

Salary: - Subject to PAYE and National Insurance (12% employee, 13.8% employer above threshold) - Deductible expense for corporation tax - Builds state pension entitlement - Often used to utilise personal allowance (£12,570)

Optimal Strategy: Many landlords pay minimal salary (around £12,570) to use personal allowance while avoiding NI, then take remaining profits as dividends.

Retained Profits: - Leave money in the company for reinvestment - Only pay corporation tax (19%) - Ideal for portfolio growth - Tax on extraction deferred until needed

### Transferring Existing Properties to a Company

While new purchases in a company are straightforward, transferring existing properties is complex and often costly:

Costs of Transfer: - Stamp Duty Land Tax (SDLT): Payable on market value, including 3% surcharge - Capital Gains Tax (CGT): On any gain since purchase - Legal fees: Both sides of transaction - Mortgage redemption: Early repayment charges may apply - New mortgage arrangement: Fees and higher rate

Example: A property bought for £150,000, now worth £250,000: - CGT on £100,000 gain: Up to £28,000 - SDLT on £250,000: £10,000 - Legal fees: £2,000-4,000 - Total costs: £40,000+

Break-even calculation: If Ltd company saves £2,000/year in tax, it would take 20+ years to recover transfer costs.

Conclusion: Transferring existing properties rarely makes financial sense. Focus on purchasing NEW properties through a company instead.

### Setting Up a Property Company Correctly

Choosing the Right Structure:

SPV (Special Purpose Vehicle): - Standard company with SIC code 68100 (Letting of property) - Most mortgage lenders require this specific setup - Straightforward structure for portfolio building

Trading Company: - For development or property trading - Different tax treatment - Less favourable for long-term rental holding

Key Setup Steps: 1. Register limited company with Companies House 2. Use SIC code 68100 (letting) or 68209 (other lettings) 3. Open business bank account 4. Engage property-specialist accountant 5. Ensure company memorandum allows property ownership 6. Apply for SPV mortgage in company name

### The Inheritance Tax Angle

One often overlooked benefit of Ltd company ownership relates to inheritance planning:

Personal Ownership: - Properties form part of taxable estate - IHT at 40% on assets above nil-rate band - Main residence nil-rate band doesn't apply to BTL

Ltd Company Shares: - Company shares can be gifted while retaining control - Business Property Relief potentially applicable (consult specialist) - More flexible estate planning options - Can transfer shares gradually over time

### Making Your Decision

Use this calculator with realistic figures for your situation. Consider:

1. Your current and expected tax rate - including how rental income affects your bracket 2. Mortgage interest as % of rent - higher leverage increases Section 24 impact 3. Portfolio plans - single property vs growth strategy 4. Income needs - do you need rental income now or can you reinvest? 5. Long-term intentions - holding period and exit strategy

Important: This calculator provides estimates for comparison purposes. Always consult a qualified accountant who specialises in property taxation before making structural decisions. The interaction between personal circumstances, allowances, and tax rates creates complexity that simplified calculators cannot fully capture.