Buy-to-Let: Should You Buy Through a Limited Company or in Your Own Name?

This guide helps provide clear, actionable advice to clients on whether to purchase buy-to-let (BTL) properties through a limited company or in their personal name.

1. Key Differences: Limited Company vs. Personal Name Ownership

Advantages of Buying in a Limited Company

✅ Tax Efficiency:

• Corporation tax (25% in 2024/25) is lower than personal income tax (up to 45% or an effective 60% between £100,000-£125,140).
• Mortgage interest is fully deductible, unlike the 20% restriction for personal ownership.

✅ Profit Retention & Reinvestment:

• Profits stay within the company for future investments without triggering personal tax liabilities.

✅ Inheritance Tax (IHT) Planning:

• Shares can be gifted gradually, using annual allowances to reduce taxable estate value.

Disadvantages of Buying in a Limited Company

❌ Higher Mortgage Rates:

• Limited company mortgage rates are typically 1%+ higher (e.g., 6.5% vs. 5.5%), increasing costs by ~£2,500 per year on a £250,000 mortgage.

❌ Administrative & Compliance Costs:

• Extra setup and maintenance costs (£500-£2,000 per year for accounting).

❌ Capital Gains Tax (CGT) Exposure:

• Gains are taxed at 25% corporation tax. Additional tax applies if funds are withdrawn as dividends (up to 39.35% for higher-rate taxpayers).

Advantages of Buying in Personal Names

✅ Lower Entry Costs & Easier Financing:

• Mortgages have lower rates and fewer restrictions.
• No need for company setup or maintenance.

✅ Capital Gains Tax Reliefs:

• Individuals get a CGT annual exemption (£3,000 in 2024/25).

Disadvantages of Buying in Personal Names

❌ Higher Tax on Rental Income:

• Taxed at 20%, 40%, or 45%, with no full mortgage interest relief.

❌ Inheritance Tax Exposure:

• Properties remain in the estate, subject to 40% IHT above the nil-rate band.

2. Using a Family Investment Company (FIC) to Reduce IHT

What is an FIC?

A family investment company (FIC) is a private limited company used to hold and manage family wealth, including buy-to-let properties. It allows control to remain with one generation while passing growth to the next.

How an FIC Reduces IHT

• Parents retain control with voting shares but issue growth shares to children or trusts.
• Over time, the value of growth shares (and underlying assets) shifts out of the parents’ estate, reducing IHT liability.

📌 Example:

• Parents invest £2 million in an FIC, generating £100,000 rental income annually.
• Over 10 years, they transfer £1.5 million in growth shares to children.
• This saves up to £600,000 in IHT (40% of £1.5m).

Costs of an FIC

💰 Setup Costs: £5,000-£10,000 (legal & tax advice).
💼 Ongoing Costs: £2,000-£5,000 per year (accountancy fees).

3. Numbers Comparison: Limited Company vs. Personal Name

📊 Example Scenario

• Property Price: £500,000
• Rental Income: £25,000/year
• Mortgage Interest: £15,000/year
• Personal Income: £50,000 (basic-rate taxpayer)

Key Insight: A limited company structure results in higher retained profits but requires a long-term strategy to maximize tax efficiency.

4. Key Takeaways for Advisors

🏢 Limited Company:
✔️ Best for higher-rate taxpayers reinvesting profits or planning generational wealth transfers.
✔️ Higher costs upfront but long-term tax efficiency.

🏡 Personal Name:
✔️ Simpler & cheaper for small landlords or basic-rate taxpayers.

👨‍👩‍👦 Family Investment Company (FIC):
✔️ High-net-worth solution for IHT reduction & wealth preservation.
✔️ Requires long-term planning & expert guidance.

5. Actions for Mortgage Advisors

✅ Assess Client Goals:

• Are they focused on cash flow, long-term growth, or inheritance planning?

✅ Highlight Costs vs. Benefits:

• Use real figures to illustrate the financial impact.

✅ Collaborate with Tax Experts:

• Ensure strategies align with overall financial goals.

📢 Final Thought: The right choice depends on a client’s tax position, investment horizon, and estate planning needs—help them make an informed decision!