Should expats set up a limited company for buy to let?

Record numbers of landlord’s set up buy to let companies in 2023 (according to Hampton’s). Without hard data, I can’t be sure, but my guess is, many expats, have decided wrapping their property portfolio in a limited company structure makes sense too.

What is clear, is that more overseas investors are choosing the company structure. Hampton’s say:

53% of new shareholders in buy-to-let companies set up by GetGround during 2023 were based overseas, up from 45% in 2021. Together investors from Hong Kong and Singapore accounted for just under a third of all overseas shareholders.

Though the limited company structure has been around for a while, it is only recently that it has come to the fore.

In fact, it’s not long ago that most landlords probably didn’t even know what it was. Things changed for good on an inauspicious day in April 2020, when tax laws changed completely. Although, changes had been gradually taking place in the background since 2016.

You see, once up on a time you could deduct mortgage interest and other allowable costs from rental income before calculating any tax liability. You don’t have to fully understand the implications of that, only that it was a great thing.

HMRC tinkering

But unfortunately, like all great things, that method of calculating tax liability has come to an end. Blame those tinkerers over at HMRC, who seem to have a perpetual need to take away with one hand while not giving much back with the other.

To be fair to them, they didn’t just end this nice tax break overnight. There was something of a transition period where you could partake in a little deducting, but that was finally put to bed on the 6th April 2020.

From that day onwards tax relief for finance costs became restricted to the basic rate of income (currently 20%). So nowadays, relief is provided as a reduction in tax liability rather than a reduction to taxable rental income.

What that essentially means is that (you guessed it) many landlords now pay more. This is particularly true for higher or additional rate tax payers.

And it could be said that this is the latest (sure not to be the last) in a long line of benefits that have been slowly passing like ships in the night, leaving the way for increased stamp duty, reduced capital gains tax breaks and the like to became the norm.

It seems that the party is well and truly over. At least for some that is.

Those in the know, have other ideas and here’s where setting up a limited company for buy to let comes into play.

Professional property investing

You see the minute your property business becomes a company lots of things change. Most importantly, mortgage interest can be set against rental income (just like in the good old days!).

And then a close second is the fact that limited companies pay 19% corporation tax on profits, no matter whether the focus of the business is property or anything else.

There’s also the fact that you have limited liability. You no longer own your properties, the company does.

And for many landlords that’s enough for them to take the plunge and take the corporate route.

And let’s be clear, for certain landlords, that is absolutely the right thing to do. It can make total sense for some situations but that doesn’t mean every expat should set up a limited company for buy to let. Not by a long shot.

In fact, many expats could be making a big mistake. Let me explain.

The first thing to recognise is the fact that limited companies come with added expenses themselves. For one, mortgage rates are higher and over time and multiple properties this matters.

Then there are all kinds of costs that come with running your own business. Most people won’t want to run a business without finding a good accountant for example.

Not to mention the tax problem!

More tax!

I know what you are thinking. Isn’t the whole point of running a property business in a limited company setup the fact that you pay less tax. Haven’t we already discussed this?

The thing is, as with anything to do with either HMRC or tax it doesn’t take long for things to start getting complicated.

Let’s start with that nice low corporate rate of 19%. In practice, this only applies to profits below £50,000. That’s because unfortunately a new 25% was introduced in 2021 on greater amounts.

Another issue comes down to what you are going to do with your profits. If you are lucky enough not to need them for daily life and instead let them remain in the business you can ignore this next bit.

On the other hand if you are in the majority because you need your rental income to supplement your life expenses be warned that any money you take out of the business is ripe for tax.

Pay yourself a salary and not only do you end up paying tax twice, you may also have to pay national insurance contributions, which is why many favour taking money out of a company via dividends.

The good news is, non UK residents don’t pay tax on dividends, the bad news is you may be taxed wherever you live so you need to be clear what your current tax situation is before going ahead.

A non UK resident individual, who is in receipt of income from UK interest and/or dividends, is not taxable in the UK, on the UK interest or dividends received (HMRC)

Tax is complicated

At this point it is worth just reiterating that tax is complicated. I could include a wide range of worked examples comparing the tax you pay within or outside of a limited company in a particular country and still get nowhere near covering your personal situation.

You really do need to do your own due diligence and get the calculator out. (If you don’t like number crunching find an accountant that does. You can read about how to find one here).

PwC have a great tool that can give you a neat summary of the tax situation where you live. Just key in the country name and you’ll get the lowdown on their tax system.

You can find it here.

That said, as a rough guide, I think there are certain types of people where it would probably make sense to set up a limited company for their properties.

Who should set up a limited company for buy to let?

If you fall into one of the following groups setting up a limited company for your property investments might just make sense.

High Income UK Tax Payers – If your UK taxable income is greater than £50,271 meaning you are classed as a higher rate tax payer placing your property investments within a limited company structure will usually save you money.

Landlords paying lots of mortgage interest – The fact that you can claim mortgage interest as an operating expense means anybody with a heavily mortgaged portfolio may save a lot of money if they set up a limited company. This is particularly true when rates are high or rising.

Those with an eye on their heirs – Wrapping your buy to lets in a company structure may make sense if you intend to pass them on to the next generation. The bigger your portfolio the bigger your tax savings are likely to be.

Growth investors – If you are investing with a focus on growing your wealth, not spending it, so in the privileged position of not needing to take money out of your property business setting up a limited company for your investments tends to make sense.

Flippers – There is a different kind of property investor out there worth mentioning here. One who likes to make money by trading properties. They buy low with the intention of selling high for a quick profit. Doing this outside a limited company set up is more than a little tax inefficient.

Who shouldn’t use this set up for their property business

According to HMRC English Private Landlord Survey (2021), most landlord’s have small portfolios. 43% of landlords had one BTL and 39% had between two and four.

And any expat with a British passport (ie most of us) should be eligible for the personal allowance which means you wouldn’t pay tax until on your rental income until it topped £12.5K or £25K if you are one half of a British expat couple.

Lets say you earned the average rental yield, currently 4.75% (According to PropertyData).

So a £250K’s worth of property could probably generate an income tax free or over half a million if you are a couple (of UK passport holders).

• £263K * 4.75% = £12.5K
• £526K * 4.75% = £25K

And even if you go earn more than that, don’t forget you only start to pay income tax on the amount above those numbers so your effective tax rate will be lower.

In other words, for many expats with smaller portfolios the fees associated with a limited company (& the hassle) probably aren’t going to be worth it.

The bottom line

The bottom line is, there’s no one size fits all approach here. You need to think about your particular situation and do your due diligence.

If you find yourself in one of those groups listed above the limited company approach might just be the right choice for you.

But even then, it is not set in stone. A little research on your part is unavoidable. Somebody is going to have to dust off the calculator and do some serious number crunching, whether that be you or your accountant.

For what its worth I’m guessing more than 50% of people reading this will probably do better avoiding the company structure altogether.