Buy to Let Business | The Complete Guide

28-March-2024 9:20
in Mortgage
by Sam Hodgson
Buy To Let Business

Being a landlord can be a very lucrative business.

Even when the property market struggles, long-term investment in property has shown itself historically to be a stable venture. Plus, it can become a flexible and scalable business enterprise.

With a range of advantages, from tax benefits through to administrative benefits, running your rental property as a professional buy-to-let business is beneficial for many. But what does it mean to own a buy-to-let business, and how does incorporating as a limited company help? At Clifton Private Finance, we have the answers.

Table of Contents

Why Use a Buy-to-Let Business?
The Pros and Cons of a Buy-to-Let Business
Mortgages for Buy-to-Let Businesses
How to Setup a Buy-to-Let Business
Converting From a Private Landlord to a buy-to-Let Business
5 Buy-to-Let Business Taxes to Know
Additional Finance for a Buy-to-Let Business
Mortgages and Business Finance with Clifton Private Finance 

Why Use a Buy-to-Let Business?

The term ‘buy-to-let business’ is a little misleading, as anyone renting out a property is technically running a buy-to-let business - even if it’s just one property to a reliable long-term tenant. However, what we mean by a buy-to-let business is a fully incorporated limited company.

Don’t let the terminology put you off, however, there’s nothing frightening about setting up a limited company, and there are a lot of good reasons to consider it when you’re a landlord.

When you let your properties as an individual, you pay tax on the income as personal income tax. If you have a regular job on top of being a landlord, this can lead to a significant rise in your personal income and often mean you fall into the higher 40% tax bracket.

This isn’t the only advantage, however. 

The Pros and Cons of a Buy-to-Let Business

Running your property portfolio as a buy-to-let business means:

  • PRO: Tax benefits

Paying corporation tax plus dividend tax is typically lower than personal income tax, meaning that you ultimately pay less tax on your property income.

CON: Tax and accounting complexities

Managing your accounts and applying the correct tax allowances to ensure you minimise your tax liabilities can be complicated and require professional understanding. You are likely to want to employ an accountant to manage your finances, which can add an additional expense.

  • PRO: Lack of personal liability

When your buy-to-let business is a limited company, your personal affairs and business dealings are legally separated. This means that you will no longer be personally liable for any losses.

  • PRO: Ease of business-to-business property transfer

Moving properties between businesses doesn’t evoke the same tax liabilities, such as inheritance tax, capital gains tax, or stamp duties. If you intend to increase your portfolio, these savings can be considerable.

CON: Costs of moving personal property

Transferring any properties you already own as an individual into the company structure will incur significant additional costs. These are outlaid later in this article.

  • PRO: Unrestricted mortgage interest tax relief

The restrictions present on personal buy-to-let (BTL) mortgage interest tax relief do not apply to limited companies.

CON: Tighter range of business buy-to-let mortgages

The market for personal buy-to-let mortgages is wider than that for limited companies, meaning there are fewer BTL mortgage products available for buy-to-let businesses. However, there is growth in this particular market and more products become available each month.

Want to explore your buy to let mortgage options and see how much you can borrow?

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Mortgages for Buy-to-Let Businesses

Mortgages for buy-to-let businesses can be a little stricter than those for individuals.

One restriction for many lenders is that they are looking for the BTL company to be established before providing additional mortgage facilities, which can mean multiple years of accounts.

Of course, this is not the case for all lenders and with help from an experienced broker, such as us at Clifton Private Finance, you should find a buy-to-let mortgage even when your company is a start up - though, you should be prepared for a more restrictive terms.

One of the greatest advantages is with buy to let portfolio mortgages. Designed for businesses with multiple properties, a portfolio mortgage provides financing that is leveraged on the entire group of properties rather than taking each building on a case-by-case basis.

This means LTV calculations are spread and greater levels of financing are available.

As mortgage specialists, Clifton Private Finance are perfectly placed to provide you with all the assistance and advice needed to get you the property financing you require. Contact us to discuss your buy-to-let business needs with an experienced advisor today.

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buy to let portfolio mortgage

How to Setup a Buy-to-Let Business

Setting up a limited company in the UK is an easy initial process. Registration can be done on the UK government website (Companies House) and only costs £12. It takes 24 hours for your company to be registered and that’s it - you’re officially incorporated.

You must also register for corporation tax. Online applications are typically done at the same time as the company registration but you do have up to three months to complete this stage of the legal application.

Other considerations may include:

  • Developing a business plan to lay out your business ideas and financial forecasts in a clear, comprehensive fashion - a business plan will also help in getting further financing.
  • Setting up a business bank account in the company name.
  • Retaining a professional accountant / bookkeeper for your records, accounts, and tax returns.
  • Investing in administrative software, both for the running of the business and the organisation of your properties.

While starting a new business can feel like a significant undertaking, it is really relatively simple and the system is designed to help, rather than hinder your application.

buy to let portfolio mortgages

Converting From a Private Landlord to a Buy-to-Let Business

If you are already a private landlord, you will want to bring your properties over to the business. This can be an involved process, so it’s important you get it right.

In order to make this move, you will have to sell your properties to your business. This will incur significant costs and, while these will be offset in the years to come, could represent a substantial initial investment. They include:

  • Stamp Duty Land Tax - The company will have to pay this at the higher rate.
  • Capital Gains Tax - This will be the residential property rate of 18% if your total annual income is in the basic rate band, or 28% if in the higher rate tax band.
  • Mortgage Administrative and Finance Costs - You will be taking out a new mortgage in the company name and fees will be due.
  • Early Repayment Charges - Your existing personal mortgage will likely have early repayment charges as part of the terms, and these will be due.

It is important that you calculate all of these charges and properly evaluate the advantages and disadvantages of transferring your property to a buy-to-let business. Speaking to a financial advisor who is experienced in these matters will help you make a properly informed decision.

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5 Buy-to-Let Business Taxes to Know

The buy-to-let tax situation is complicated and we do advise that you speak to a professional tax specialist to evaluate your personal situation before moving ahead. The following are the basic tax rules that will affect your decision:


1. Income Tax vs. Corporation Tax

When you run your property portfolio as a limited company rather than an individual landlord, your company will pay corporation tax of 19% rather than your personal income tax, either at 20%, 40% or 45% (depending on your tax rate).

When you draw that money from the company as a dividend, you will pay the lower dividend tax rate of 8.75% for basic-rate taxpayers, or 33.75% for higher-rate. Additionally, there is a tax-free dividend allowance of £500 in addition to your personal allowance.

Calculating the exact tax that will be paid on your income from your rental properties can be done by your accountant, who can properly advise while considering the specifics of your personal situation.

Generally speaking, setting up a buy to let business can work out as a tax saving for those who are already earning enough to pay 40% or 45% income tax. 


2. Mortgage Tax Credit for Individuals

Landlords are able to claim a 20% tax credit on their mortgage interest payments. So, if your mortgage interest is £15,000 per year, you will receive a £3,000 tax credit.

While this is a sizeable credit for individuals paying the basic rate of tax of 20% and can mean that remaining as a personal landlord rather than moving to a buy-to-let business makes sense, for those on a the higher rate of tax of 40%, the tax credit credit is less significant and the benefits received from replacing income tax with corporation tax (currently 19%) are typically more valuable.


3. Mortgage Interest as a Business Expense

Claiming the mortgage interest as a business expense is another layer by which running your BTL properties as a limited company has an advantage. It is difficult to make an estimate on this impact, as a lot depends on your specific situation, but for higher rate taxpayers this plays another significant part in the appeal of a buy-to-let business.


4. Business Relief for Inheritance Tax

One consideration for property owners is what happens when they pass away and want to leave their property portfolio for their loved ones.

The inheritance tax rules are strictly enforced when leaving personally owned properties to your children, but with business relief for inheritance tax, a limited company can pass on those sizeable assets with 50% tax relief, or leave the entire company with 100% inheritance tax relief.

Business relief for inheritance tax can be complicated, so make sure to discuss this with your financial advisor before making plans.


5. Capital Gains Tax and Limited Companies

When you sell a property as a private landlord, you will have to pay capital gains tax; however, a limited company is exempt from capital gains tax, which is replaced by corporation tax for taking profit out of your business.

While there are a few cases where the capital gains tax would have been smaller, in the main, the advantage is with the limited company set up. 

Additional Finance for a Buy-to-Let Business

When you consider finance for your buy-to-let business, it is typical to think of the mortgage and little else, however you may want to look at your new business with a wider perspective, improving your cash flow and making your time as a landlord easier.

For BTL companies, this can include having money ready to pay contractors to work on your properties, regular outgoings for utilities, and administrative costs that may include salaries as well as other expenses.

If you look at your buy-to-let business as a fully formed business with you as a director, then you may see ways you can expand and make greater profits - and there are many financial products available for you that can help:

-      Loans - Business loans can help you get the capital you need for setting up your business as well as providing funds for expansion.

-      Asset Finance - A range of asset finance products exist to help you equip your business. You may expand into undertaking the maintenance of your properties (and those of others) directly and have a need for a company van, or perhaps you want to run a full office and want to make use of asset finance for office furniture and equipment.

-      Lines of Credit - Smoothing your cash flow is important, especially as property management can involve some sudden unexpected bills. Look to set up a revolving credit facility to have ready for those moments when a helping hand is needed.

-      Portfolio Mortgages - Many BTL business owners look to expand their property empire. Portfolio mortgages (typically for four or more properties) are ideal for landlords looking to build a strong property business.

-      Bridging Loans - Take advantage of opportunities, such as properties selling cheap at auction, with a short-term bridging loan. With a mortgage ready to take over as an exit strategy, bridging loans can let you access the funds you need for an immediate decision while the more time-consuming mortgage administration is undertaken. 

Mortgages and Business Finance with Clifton Private Finance

At Clifton Private Finance we have a team of property experts waiting to help you with your buy-to-let business. As a business finance broker specialising in mortgages, we have strong relationships with all the major lenders in the UK, as well as access to a wide range of specialist mortgages and other business finance.

Speak to us today to discover how Clifton Private Finance can help you get your buy-to-let business off the ground.

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