Should Landlords Use A Company To Purchase BTL Property?

As far as I’m concerned, the biggest drawback to buy to let investors is the huge tax implications. You could potentially end up paying a massive 40% of your profits because of capital net gains. That’s a lot of lost profit (politicians may disagree- but who cares?).

There are many reliefs and deductions you can claim and there is plenty of scope for constructive capital gains tax planning. However, a personal favourite option of mine is to use a company to hold the properties. Consequently, you could end up with as much as 47% more profit after a few years.

So what exactly am I suggesting? Start up your own company and get the company to hold the properties to take advantage of cooperation tax and dividends, amongst other benefits.

Advantage of Using a Company to Invest in Property

The main reason to use a company to invest in property is the benefit of taking advantage of corporation tax rates and dividend tax rates, which are substantially lower than income tax and capital gains tax rates.

– Transferring Ownership
If for example you want to gift a property to your son, then this will incur a capital gains tax liability if held outside the company. However, if you have the property inside a limited company, your son can subscribe for some shares.

If this is done then the ownership can pass to your son tax-free, as the value of the transfer can be held over for capital gains tax purposes.

– Lower Tax Rates
As a higher rate taxpayer, you pay 40% on your profit and gains. For a limited company, the tax rates are between 0% and 30%, a considerable saving!

– Dividends
A limited company can pay out profits in the form of dividends to shareholders, which attract under present legislation no National Insurance Contributions. You can use this to determine the income you receive in a particular year. So some years you may take money and some years you may not. You only pay tax on the amounts you take. As an individual you are taxed on all your income whether you want it or not!

Although, dividends is still taxable; the rates are still lower than capital net gains IF you plan on selling the property under 10 years of ownership. Here’s a good article on dividends tax explained. I say under 10 years because a personal owner of a property can take advantage of taper relief after 10 years of home ownership while companies cannot.

The rate at which dividends tax is payable depends on the amount of a company’s profits for the financial year in question.

Dividend income in relation to the basic rate tax bandTax rate applied after deduction of personal allowance and any blind person’s allowance
Dividend income that falls below the £34,600 basic rate tax limit10%
Dividend income above the £34,600 basic rate tax limit32.5%

Base rate of corperation tax is 30%, but there’s a reduced rate for small companies. Coroperation tax rates:

Rates limits and fractions for financial years starting 1 April2007
Main rate of corporation tax30%
Small companies’ rate (SCR)*20%
SCR can be claimed by qualifying companies with profits at an annual rate not exceeding£300,000
Marginal small companies’ relief (MSCR) lower limit300,000
MSCR upper limit£1,500,000
MSCR fraction1/40
Special rate for unit trusts and open-ended investment companies20%

* For companies with ring fence profits the small companies’ rate of tax on those profits remains at 19% and the MSCR fraction 11/400 for financial year 2007 starting 1 April 2007. Ring fence profits mean the income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf.

The main rate of corporation tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply.

Now compare those to income tax:

Income (£)Tax rate (%)
0 – £2,23010%
£2,231- £34,60022
Over £34,60040
1,500,00030

Ultimately, what is left remaining, if any, after taking your dividends, the remaining profit will be liable for cooperation. Corperation tax is the tax that the company pays on its profits and dividends are monies taken out of profits that are paid to shareholders. How you decide to extract profits depend on how much you earn, and how much profit your company makes, how many expenses you have- that’s where a good accountant is handy. However, if your annual income is below 34.6k, it makes a lot of sense to pay yourself dividends to bring you up to the line, and declare the rest as company profit and pay cooperation tax on the remaining.

– Property Development Profits
Property development is a trade. Using a limited company will help you keep much more of the profit to use in the next development! If you’re receiving 100% profit from rental income (i.e you have no mortgage on the property), then the money you receive could go towards the deposit on another property under the name of the company (but the profit will still be liable for coroperation tax, unless you put the money down as a deposit before the end of the tax year). Otherwise, using the money as profit can be declared as dividends.

– Property Management Company
The use of a property management company can save considerable amounts of tax where it is not possible or desired to hold the properties within a limited company.

– Limited Liability
Imagine you buy a buy to let property, and your tenant has an accident, falling down the stairs of the property as one of the steps was not properly maintained. He successfully sues you and not only do you lose the property to pay for the settlement, but you have to sell your own residence as well! This can be avoided by owning the property in the limited company, where the company has LIMITED LIABILITY!

Disadvantages of Using a Company to Invest in Property

The company itself would be charged to corporation tax on the gain arising, and in addition, as already explained, you would be charged to income tax on the receipt of the dividend if you extract the remaining proceeds from the company.

If you are planning to occupy the property as a main residence, then using a company would not be beneficial. The company would not be able to claim PPR (principal private residence) relief on a future disposal. Additionally, you would be charged to UK income tax on a benefit in kind arising from the provision of accommodation by the company (unless you paid the company a market rental).

Companies are exempted from taper relief.

Who should consider using a company to save tax?

The decision as to whether a company should be used to hold the new investment property will essentially depend on your future intentions.

If you are more concerned about minimising taxes on any ongoing rental income the company may be the most tax efficient option, particularly if the profits are retained within the company for the purchase of additional properties. The company rate of tax (20%) would be much less than the higher rate of income tax the owners would suffer (if higher rate taxpayers). If profits were extracted the additional income tax payable on receipt would eliminate much of the benefit, but if the profits were retained in the company there would be no additional taxes. This is the real advantage of using a company.

In summary, where possible capital treatment should usually be aimed for those wanting to minimise the tax payable. If a significant gain is expected to be made when selling the property, particularly for long-term investment properties, then personal ownership is usually preferred.

Is it Easy to Start a Company?

Starting and running a company in the UK is cheap and easy. It costs about £100 to set one up and to have a set of annual accounts produced can end up costing no more than £500. That’s a relatively good investment considering you stand to save thousands with the benefit of cooperation tax.

Final note

In all cases you need to compare dividend tax to capital gains to corperation, to work out which will benefit most. In my personal case, I plan on keeping my properties for over 10 years, so I’m going to benefit from taper relief- I won’t need to start a company. But for those that don’t have a mortgage and receive rental income, it’s well worth starting a rental company. If you plan on selling property that you haven’t owned for more than 10years, it also might be worth starting a property company so you can benefit from coroperation tax rates or tax on dividends rates.

I would definitely suggest seeking advice from a well-experienced accountant, because they can calculate which options will benefit you most.

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53 Comments- Join The Conversation...

Showing 3 - 53 comments (out of 53)
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Catherine 6th May, 2009 @ 18:43

In my line of work i often get approached by landlords living overseas to "look after" the property and be that contact if anything goes wrong etc. I said I could do this separate to my job and change a small fee, what would happen with tax?
If they required me to collect rent, I would want the tenants to set up standing orders how would I go about managing this and not being tax on what coming into a bank account etc.

Thanks,

Cath

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Bill 14th November, 2009 @ 14:52

Landlords who are resident outside the UK have to receive authority to receive rents from their UK tenants by applying to HMRC for the Non-Resident Landlords Scheme (NRL scheme. It is also their responsibility to advise HMRC of the names and addresses of tenants. If you act for overseas landlords then you would be best advised to contact HMRC to advise them as to what you are intending to do and seek advice if you do not have a professional tax adviser.

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Bill 14th November, 2009 @ 14:55

Landlords who are resident outside the UK have to receive authority to receive rents from their UK tenants free of withholding tax by applying to HMRC for the Non-Resident Landlords Scheme (NRL scheme. It is also their responsibility to advise HMRC of the names and addresses of tenants. If you act for overseas landlords then you would be best advised to contact HMRC to advise them as to what you are intending to do and seek advice if you do not have a professional tax adviser.
see the link http://search2.hmrc.gov.uk/kbroker/hmrc/forms/viewform.jsp?formId=743

as regards certificates and procedures that you might need to engage with

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Tony 13th July, 2010 @ 14:58

This sounds like the route myself and my partner should be taking. We currently have 2 investment properties and are looking to incraese that by another 2. One question, how do you actually fund the properties. If the properties are on buy-to-let mortgages which are tied to the my name, would that cause an issue if they are held with in a company?

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Jools 13th July, 2010 @ 16:51

Yes! B2L mortgages for limited companies are almost non existent and if they are available they are very expensive!

Especially in this climate, you need to take professional tax advice on your portfolio and investment planning.

Cheers

Jools

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craig 3rd September, 2010 @ 15:01

Can you expense your mortgage payments so as not to pay corporation tax on them?

Cheers

Craig

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Bill 19th January, 2011 @ 22:11

Of course if a compnay has aloan at interest it can set the loan interest off against its profits to pay a reduced amount of corproation tax (which is payable on the letting and other profits of the company. However loans held in a shareholder or directors name could cause problems -especially if the company paid the interest either to or for the shareholder or director. Effectively the director would be chargeable to tax on the interest but would not be able to claim any reduction for the interest he/she pays on their personal loan (i.e. there was no loan advanced to the director/shareholders close tradign company as letting is not trading

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Billy 28th January, 2011 @ 11:52

Is it possible then to maintain ownership of properties then let to a limited company (owned by yourself) and then have the limited company let to the tenant? Profits then could be kept in the company and drawn out when you require.

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Bill 28th January, 2011 @ 13:08

So you think the taxman is going to be happy for you letting your company use your assets for no consideration and without you suffering tax on the rents that would be payable to you. How are you going to get round the income shifting avoidance legislation?

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KIM 25th March, 2011 @ 11:46

i a a owner of aunoccupied property. numerous attempts to fix it up as failed due to shit builders and now the council and my lovely neighbours have flytipped and fined me a ridiculoues amount. i currently have a 11grand flytippng fine and randomly cuncl tax fines (when my property is put down as an empty property band a ) what do i do.te fines are building up monthly!!!! i simply cannot afford to pay it let alone do up my house. i really need some advice

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Rohan 30th June, 2011 @ 10:49

I have a property which is rented and I have a ltd company which I use to provide consulting services. I would like to buys more properties for rent.

How easy or difficult is it to tranfer property into ltd company? I own 100% of both.

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Andre Roberts 6th July, 2011 @ 13:31

I have a number of properties which I own, some let for holidays and others under short domestic tenancy agreements, I also carry out some property development and project management. Can I bring this all under the banner of one limited company even though I own the properties, so that the new company would then run the day to day business but not own the property. I have been told that I cant own a property and be a director of a company managing the property, but i don't really want to run things as part limited and part sole trader. Sorry hope this is clear

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Raj 19th August, 2011 @ 15:20

Thanks for the great article. just a little query,in the above article it said that upon transfering ownership the capital gains can be held over. I thought that hold over relief is only available to trading companies and not investment companies. A company with the sole purpose of letting property whould be classifed as an investment company would it not?

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Bill 19th August, 2011 @ 19:57

you are correct Raj

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Robert 2nd November, 2011 @ 17:02

I currently have a limited company for providing consultancy services. Given this only keeps me occupied half my time I would like to branch out into property investment.
At the moment i have one investment property held privately.
Please comment is it practical for me to use the existing consultancy company for the property investments and hence use any residual consultancy profits to fund the investments. Any thoughts appreciated.

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Cardifflandlord 2nd November, 2011 @ 18:01

Robert,

FSA has rules about non licensed people giving financial advice so all I would say is go and speak with your accountant regarding this.

personally I too have a Ltd company for my renovations but rentals go through me privately because at the time the corporation tax was greater than the liabilities that would be incurred privately.

Hugely complicated area that if you get wrong will cost you thousands. Seek professional advice before doing anything.

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Stephen 10th August, 2012 @ 23:01

My Father owns many rented homes and is paying ridiculous tax, I'm trying to reduce his tax bill and a LLC could be the way, but would he have to sell the houses to the LLC and pay large CGT? Some houses have more than doubled since bought. He is also self-employed, could he put his wage into the LLC also? Then could he not pay himself and my Mother PAYE upto the limit before taxation, and dividends when needed? Do you know any books for him to read on this subject? Sorry for so many questions.

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PeterPeterP 19th September, 2012 @ 12:54

We have a limited investment company that purchased a property some 20 years ago. If we were to sell it now would the company pay 35% capital gains on the the difference between buying and selling price ( less expenses etc ) or would it be different because of the amount of time involved?
Peter

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Rental Investor 10th October, 2012 @ 22:40

I found this guide and it was exactly what I was looking for. The only problem is that it is relevant to the UK only and I live in America. Can anyone point to a guide of this caliber for American property investments?

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Tony 15th November, 2012 @ 20:17

Hi,
I have 3 properties mortgage free. Can I set-up a company with my wife & children as partners & put the properties in the company name. When my wife & I are deceased then the ownership would go to my children & they could divide the estate equally. How would that work please.

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Jeremy 15th November, 2012 @ 22:10

Hello Tony,

To answer your question: "Can I set-up a company with my wife & children as partners & put the properties in the company name" quite literally: You can do whatever you like, it's a free country.

A slightly more helpful answer would be fome to ask the thing you've not mentioned: Why do you want to do this?

When you die (sorry to be blunt) your estate is valued and death duties are based on the value of the estate, irrespective of the form of that value. So if you own three houses worth, say, £500k then that's your estate. If you own shares in a company which owns three houses worth £500k, then your estate is still worth £500k.

You can set the ownership of the houses to "Tenants In Common" in your will to allocate % shares they will receive.

Please rmemeber this post was created in 2007 and tax laws, rates and reliefs are a constantly moving feast.

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Roger 23rd January, 2013 @ 16:56

I think you need to get some professional advice and stop relying on internet forums for advice on tax avoidance!

Personally I find property investors a scurge on society and the above overly simplistic attempts to avoid paying tax laughable.

Good luck with it though and remember we are watching you!

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Ben 23rd January, 2013 @ 17:30

Roger, it's great that you find property owners a "scurge" on society.
Coming from the perspective of a landlord in the USA, I have to disagree with you 200%.

Investors are enabling cities to wake up. Investors fix broken windows and put families into vacant homes. Investors are giving tenants with bad credit a place to live, and often are giving them owner financing terms to become homeowners without a bank.

Property investors buying cash are working against banks and the government who have tightened lending standards after the big mess. The banks, governments, and financial companies set everyone up for failure, NOT the investors.

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jeniffer stephnaie 18th September, 2013 @ 06:38

"Hey could you tell the advantages and disadvantages of selling annuity? Is what given in this site http://sellstructuredsettlement4buyers.wordpress.com/2013/09/13/how-to-make-sure-you-get-the-best-price-while-selling-structured-settlements/ is right?"

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Charlie Curran 29th December, 2013 @ 21:24

I am based in Ireland and looking at buying property in the UK for Investment purposes.
Does anyone know if I set up a UK property company will UK and Irish revenue accept it as I am based in Ireland.
If I purchase in my own name I will pay 47% on profits in Ireland .If I buy under a company there is a substantial difference. Will revenue see it as avoiding tax ?

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Charlie Curran 3rd January, 2014 @ 18:51

I am based in Ireland and looking at buying property in the UK for Investment purposes.
Does anyone know if I set up a UK property company will UK and Irish revenue accept it as I am based in Ireland.
If I purchase in my own name I will pay 47% on profits in Ireland .If I buy under a company there is a substantial difference. Will revenue see it as avoiding tax ?

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Primo 9th February, 2014 @ 13:17

I have reached the 40% threshold, after creating a Ltd company where did you find the funding when transfering the properties; and at what gross income level does VAT need to be considered? Did you create the company offshore and have you had any funding issues?

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Primo 9th February, 2014 @ 13:27

To clarify I reside in the UK,with a gross rental income of 65+, and will purchase a further properties where gross income is 100+.
I want to reduce my tax liability by either setting up a UK Ltd company or an Offshore. Issues - funding where in the UK once you are a company does funding come from (I realise a bank!, its the initial step where a bank will facilitate the funding with no 1st yrs accounts for UK Ltd but also an offshore).

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Charlie Curran 19th February, 2014 @ 21:08

I Funding is more difficult for a company. I can only imagine you will get max 60% funding therefore you will have to use some of your own money to set up the company
My issue is whether Irish Revenue will agree to me setting up a UK registered company for UK property while I reside in Ireland on a permanent basis ?

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Greg 17th April, 2014 @ 10:47

It seems pretty simple to me. Say you have £100k to buy a property. Start a company with £1 share capital and make a director loan of the £100k to the company. Charge the company say 12% loan rate. take the rental income and service the loan to your self. When the loan is paid off, sell the company and use your entrepreneurs relief to pay no CGT on the increase in value.

Although I need to check that the company would be classed as a trading company for entrepreneur relief.

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Greg 17th April, 2014 @ 10:51

Sorry I should have added. That means no CGT, no income tax (well some on the interest) and if your building explodes and destroys the neighbourhood the damages are limited to the company.

Actually you could go one step further. Two companies, 1 to hold the asset and one to act as the landlord. Then the asset is safe as the landlord company would be liable.

As always, a proper accountant, lawyer etc should be employed.

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bill 2nd May, 2014 @ 09:47

have a house on large plot have obtained planning for 2 additional detached houses am considering selling whole package would I pay personal tax on all of the gain

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David 18th May, 2014 @ 13:05

Hi you talk about not getting capital gains relief but can you not use the indexation charts when you come to sell the property? which should keep pace with inflation.

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bill 18th May, 2014 @ 14:11

A letting company is not a trading company

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Ahmed 10th September, 2014 @ 15:13

Hi,

I have an investment property bought 10 years ago. If I were to form a Limited company and transfer the property, will it trigger any taxes i.e. CGT or IHT.

Please advise.

Thanks

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Simon Wilkins 13th October, 2014 @ 11:54

HI

Is the - The First £10,000 of profit is tax free
The first £10,000 of profit a limited company makes is free of tax!

Still valid

Simon

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Jimmy Carr 16th October, 2014 @ 22:20

Much better ways me thinks ;-)

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Moon river 28th November, 2014 @ 14:12

The first £10k of profits is no longer tax free, all corporation tax is now at 20% on any profit.

If you are claiming interst on a loan then you have to declare this income on your self assesment form.

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ZAMAN 29th April, 2015 @ 05:36

Hi
I went to see an Accountant on ways to reduce my Tax liabilities on my rental properties,
He advised that if I were to open a PLC,
The properties would STILL REMAIN in my and my wife's name, but use the PLC AS A MANAGEMENT company,thereby paying only Corporation tax of 20%,
When I spoke to another accountant, he said it was NOT possible without first transferring the houses to the companies name, which would cost us thousands.
Can some person with experience please advise,

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ADG 31st July, 2015 @ 15:25

New petition started to request a review of the new changes to BTL taxation. Sign up here: https://petition.parliament.uk/petitions/104880

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Catherine Grove 2nd September, 2015 @ 20:30

We already have a limited company and we would like to buy a house through the business. The purchase price is more than the limited company can afford and we would like to sell our own house to loan money to the business to buy this house. If we did this we would have to sell our home and live in part of the company house and rent another part of it as a holiday let or full time lease. Is this possible?

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Adam Hosker 3rd December, 2015 @ 16:51

Good Article, but you need more disadvantages (https://goo.gl/3yzOEQ) your leaving me thinking Limited Company Buy to Let is the route to go.

One of the bigest disadvantages is that remortgage your equity growth and you will be taxed on it within a limited company and not if done personaly.

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Marc K 10th December, 2015 @ 17:22

I've been reading through comments, but wondered why no one is asking about the buy to let tax implications being phased in to 2020.

Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
So very wealthy landlords who do not need mortgages are untouched but everyone else like myself who have mortgages on all their buy to let properties is in at the deep end.
By 2020 the current loan to rental calculations when working out how much we need to repay BTL mortgage and pay tax are now all wrong as the tax bill is substantially higher.
I was going to form a ltd company but there is now talk of the government introducing new legislation so that the tax payable will still be as high as if you were acting as a sole trader.
Apart from offsetting your tax against your partners taxable income has anyone found a tax efficient way of dealing with this problem?

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Camila 12th December, 2015 @ 10:51

Hi the UK tax system seems to be straightforward unless you are looking for a clear guidance. For instance setting up a LTD company in theory incurs only company tax at a current rate. But then there are dividends, directors SA, PAYE/NIC, pension etc... So in theory the easiest way for landlords is to be self employed owners with profit from lettings. However for all of those who do not want to mix-up private life with business LTD is the way to go - many people forget that you can't set up a LTD company as rental as such as you would have to transfer property under the company ownership which will incur Land of registry, duty tax, soliciting fees and loosing ownership to a new entity etc... What you could do is to set up a property management company which doesn't own the property but collects rent for the landlord. What I am investigating at the moment (any any light into this is much appreciated) is how to transfer funds back to the landlord. For instance I am collecting a rent from a tenant in a value of 1000pcm out of this I am paying corporation tax, PAYE, wages and other costs thus what remains is i.e. 100; so can I say to the tax man that as a landlords I am happy to receive only 100 out of 1000 or NIL balance because I can make drawings in a form of dividends? or would this be consider doggy to the taxman?

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donna 18th January, 2016 @ 00:32

not looking forward to the new stamp duty payable on buy to lets from 1st April. hurriedly to trying to complete on latest property by then. Why do all governments eventually try to ruin anybody who is trying to make a better future for themselves!

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Pete 22nd March, 2016 @ 15:45

Hi Landlord
Have you considered creating a new up to date post on the comparison between personal ownership and through a company?
It seems to be very relevant at the moment and I'm sure many of your followers would find it interesting.
Keep up the good work.
Pete

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Luke 3rd June, 2016 @ 14:39

Hello,
You said "The first £10,000 of profit a limited company makes is free of tax!"
But, according to the governments site, all profits are taxed at 20%. Could you please give me the legislation that shows evidence that the first £10,000 of profit is tax free?

Thanks!

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The Landlord Avatar
The Landlord 3rd June, 2016 @ 14:48

Hi Luke,
I need to update this blog post- that stopped a while ago!

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Luke 3rd June, 2016 @ 16:05

Thanks for your answer.
Would it be possible for me to ask you some specific questions in private, about an unusual situation?

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steve thompson 24th November, 2016 @ 17:53

I have had a buy to let since 1998 I purchased for 50,000 and sold this year 31st march for £172,500
I am a lower rate tax payer and have done a lot of repairs to the property over the years, aprox£ 30,000.
I did live in the property for a short while {6months} I wondered how much tax I will have to pay in Jan 17?
hope somebody can help

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