Is it a good idea to form a limited company for a buy-to-let business?

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Question

Many landlords are forming limited companies for their buy-to-let business because of the tax advantages. Like most moneysaving strategies though, there are pros and cons to forming a limited company.

Individual landlords owning property are facing reduced tax relief on commercial mortgage interest payments. This is particularly costly for landlords who are in higher tax bands. Limited companies pay 19% tax on their profits. Many expenses can be offset against tax; for example, income can be drawn as a dividend which can be more tax efficient than a landlord individual tax on profits.

Interest rates on buy-to-let mortgages are higher for limited companies, so the extra mortgage repayments need to be offset against the tax saved. There are also costs in setting up a limited company and operating a limited company involves more administration which can be costly.

There is no definitive answer as to whether a landlord should from a limited company. It depends on how many properties they own, how many they intend to purchase and the landlord’s individual financial circumstances. Before forming a company, however, it is essential that landlords calculate whether the costs saved are more than the extra expenses.

Expert financial advice should be used. First, consult an expert tax advisor, then go to a mortgage broker who specialises in buy-to-let property. They can provide further advice and identify the best suited commercial mortgage products for both individual landlords and limited property companies.

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