Owning a Buy-To-Let Property: Limited Company or Sole Trader?

If you’re self-employed, one way to diversify your income can be to buy a house or flat to rent out. Rent is a great form of passive income that will bring you that bit of extra stability, and your property should increase in value, too. 

But should you own your new buy-to-let property as a sole trader, or is it worth setting up a limited company? In this post, we’ll take a look at the pluses and minuses of each approach.

Setting up a limited company

The term for a limited company set up specifically to own a buy-to-let property is a Special-Purpose Vehicle (SPV). The process of incorporation for an SPV is the same as for any other company, but its sole purpose is buying and owning property.

If you decide on this route, it’s the company that will own the property, receive the rent, and pay any tax owed. This means that you can only extract the profit by paying yourself a salary, dividends, or both. 

There are definite advantages to the SPV option. For one thing, you won’t be personally liable if the company runs into financial trouble. The company gets the profit and pays the tax, so it’s the company’s assets that are at risk. SPVs can also deduct certain costs, such as mortgage interest, from their taxable income. And since you’ll pay corporation tax, not income tax, the rate is much lower.

However, this route does involve a lot of bureaucracy and paperwork as well as serious legal responsibilities. You will certainly want to have a reliable tax advisor if you decide to set up an SPV to own your new property.

Staying as a sole trader

You can also simply opt to buy and own your new property by yourself, as a sole trader. This means that the rent and other income you receive will be part of your personal income and subject to income tax. You can deduct certain expenses that are exclusively for owning and maintaining the property, such as mortgage interest, landlord insurance and repair costs. But when you sell the property, you’ll pay Capital Gains Tax on the sale.

Since you personally own the property, it would be at risk along with your other assets in the case of financial trouble. However, since the rental income belongs to you, then you can access it directly without having to pay yourself from the company coffers. And it’s more straightforward to find a favourable buy-to-let mortgage in your own name, as a sole trader, than it is as a limited company. So in some respects, this option is more straightforward.

Many buy-to-let landlords find that the advantages of setting up a limited company far outweigh the relative ease of staying as a sole trader. However, it’s crucial to take expert advice before making a decision, not least because changing ownership of a property can incur Capital Gains Tax. If you would like to talk over your options, just get in touch with our team.