A guide to buy-to-let

Buy-to-let properties can be a profitable investment, but you need an understanding of the tax implications to maximise your returns whilst ensuring compliance with HMRC’s guidelines.

This guide will cover the tax considerations you need to know as a buy-to-let investor in the UK. So why is investing in buy-to-let properties such a good idea? We like the way our literary wordsmith and Tax Manager, Sean Gregory, puts it;

“There are many ways to make money in this world… but none quite so satisfactory as a passive income.”

What is ‘passive income’?

The term ‘passive income’ means income earned from something that you are not directly involved in.

It’s often used to describe income generated from buy-to-let investments, but we’re sure many landlords would consider managing a rental property to be anything but passive!

Whether you’re diving into buy-to-let property for the very first time, or you’re looking to expand your existing portfolio, we’re here to help make those goals a reality.

As the winner of ‘Best Contractor Accountancy’ at the 2023 Contracting Awards, we are proud to be classed as experts in buy to-let accountancy and taxation.

We know that being a landlord can be complicated and we’re sure you have many questions.

That’s why we’ve put together this brief guide to look at what becoming a landlord involves and the options available for funding a buy-to-let property.

Am I ready to become a landlord?

There are plenty of reasons why you might want to become a landlord. Based on the conversations we’ve had with our clients over the years, these are the ones that come up time and again:

• To make use of an inherited property
• As a source of additional income
• For investment purposes/capital appreciation
• To gain an income from the family property whilst working overseas

Whatever the reason, here are some things to consider first:

 

Remember, professional financial advice is crucial before making any investment decisions.

How to purchase a buy-to-let property

There are two main ways to purchase a buy-to-let property, either through personal ownership or through a limited company.

As a result of many changes in legislation over the last few years, which have arguably adversely affected landlords, many are starting to consider incorporating. This is in part to avoid the changes in how mortgage interest (often the largest expense for a landlord) and other finance charges are treated as expenses.

A company can still claim 100% relief on interest relating to the purchase of a property, whereas an individual can’t. While this may sound like a big enough reason to incorporate in itself, there are other aspects to consider.

Should I purchase through a limited company?

The first major barrier to incorporation will occur if you already own the property. In this scenario, you will effectively have to sell the property to your own limited company, which will give rise to a capital gain and stamp duty.

Generally, if you want to immediately gain access to profit from your rental property, it is better to own the property personally. That way, you are only taxed on the profit you make at your relevant rate of tax.

A limited company will add an additional layer of tax on your profits. Firstly, your company will be taxed on its profits, via corporation tax. Then, you will be taxed on the drawings you make, typically in the form of dividends. Finally, obtaining a mortgage for a company is sometimes more difficult than it is for an individual. We can help with this process by referring you to our associated financial advisers, who are specialists in buy-to-let mortgages.

When you come to sell the property, you (as the personal owner), will have the benefit of a capital gains allowance to offset some of the taxable gain. This is doubled if you own the property with a partner. There is no such allowance if the company decides to sell the property. If, however, you want to leave the profits in your company to build up capital and purchase more properties, then the incorporation route could be the better option.

If, however, you want to leave the profits in your company to build up capital and purchase more properties, then the incorporation route could be the better option.

Finally, obtaining a mortgage for a company is sometimes more difficult than it is for an individual. We can help with this process by referring you to our associated financial advisers, who are specialists in buy-to-let mortgages.

Responsibilities as a personal ownership landlord

If you take ownership personally, then it’s your responsibility to keep accurate records of your income and expenses that relate to the buy-to-let property.

HMRC expects the details of your income and expenses to be readily available upon request. With this in mind, we can help you organise and keep track of your income and outgoings by providing the necessary tools. This provides a clear record of how you arrived at your taxable rental income figure.

As with any income that has come about through self-employment, you are responsible for submitting details of this income to HMRC through your online self assessment and for the payment of any tax liabilities.

Self-assessment tax returns need to be submitted and any tax liability paid in full by midnight on 31st January, following the tax year end.

There are fines and penalties for late submission and payment. Plus, interest will be applied to any outstanding amount. This can quickly add up so make sure to get everything done on time. Using a trusted tax advisor will help you meet all your compliance requirements.

Making Tax Digital (MTD)

If owning the property personally, in addition to filing an annual self assessment tax return, you could be required to file quarterly submissions for Making Tax Digital.

From 6 April 2026 if you have self employed or property income of more than £50,000 you will need to follow the requirements for Making Tax Digital.

From April 2027, the threshold reduces to £30,000.

If you do meet the filing requirements for Making Tax Digital then we can help ensure you meet all the compliance obligations.

What to expect if you decide to incorporate

Purchasing a property through an incorporated company is sometimes referred to as a Special Purpose Vehicle or SPV.

The first thing to consider when looking at renting a property through a limited company is that the company will be a separate legal entity from yourself. This means that any profits, assets and liabilities all belong to the limited company rather than you as an individual.

How to fund a limited company

Below are some ways in which you can fund your company and, therefore, fund your property purchase.

Director’s loan

You, as the owner/director, can lend the company money to fund the purchase. Any amounts introduced to the company are simply an unsecured loan and don’t need to have any fixed terms for repayment or interest. Plus, the repayments of this loan are tax free. Sometimes it’s tax beneficial for a director to charge interest on a loan to their company anyway and make use of their personal savings allowance.

Loan from family and friends

A loan from family or friends works in a similar way to that of a director’s loan, but the repayment amounts would be due to the family member or friend rather than yourself as director.

Mortgage

This is the most common way to fund your company. Your company will obtain a mortgage directly and any interest on the mortgage will qualify as a business expense in full.

Business to business loan

If you already have another trading limited company, then you could look at lending the funds from one of your companies directly to another. The key advantage of this is that you wouldn’t pay income tax on the dividends you draw from your company in order to inject into the new company as a director’s loan.

We strongly recommend that you speak to us before doing this so as to ensure you don’t accidentally give yourself a personal tax bill.

Limited company director’s responsibilities

As a director of a limited company, you must adhere to the rules set out by The Companies Act and tax legislation. These include legal and financial responsibilities, such as:

Annual accounts

These need to be submitted on an annual basis to Companies House. This is typically done within nine months of the year end date.

Confirmation Statement

The Confirmation Statement is submitted to Companies House on an annual basis. This provides them with up to date information on your limited company. This information includes details on directors, the shareholders, and the company’s address.

ATED Returns

ATED Returns stands for Annual Tax on Enveloped Dwellings. This is an annual form that should be completed if your property has a value of £500,000. If your property is let on a commercial basis then there should not be any liability arising from this. If you can, it’s important to ensure that your property is exempt, as tax liabilities can become significant.

If you’re unsure if your property can be exempt, we are happy to provide guidance on this.

Let’s talk about expenses

One of the questions we get asked the most is, “How can I minimise my tax liability?”

To ensure that the tax liability on your rental profit is as low as possible, it’s important that you keep accurate records of the expenses your rental property has incurred.

The rules are complex surrounding what can and can’t be claimed for as expenses for residential properties and furnished holiday lets. However, we’ve summarised it for you here:

Put simply, allowable expenses are generally things you spend money on as part of the day to-day running of the property.

This includes:

• Letting agents’ fees
• Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
• Accountants’ fees
• Buildings and contents insurance
• Interest on property loans
• Maintenance and repairs to the property but not improvements
• Utility bills
• Rent, ground rent, service charges
• Council Tax
• Services you pay for
• Other direct costs of letting the property
• Replacement cost of furnishing, though not the initial purchase

TAKE THE TEST: Is buying through a limited company right for you?

We’ve put together a simple test to determine if purchasing a buy to let property through a limited company is the right option for you:

Thanks for reading. Need more help?

We hope that our guide has been helpful. Getting buy-to-let property right can be a challenging but, ultimately, very rewarding experience. If you have further questions or want to find out more, we’re all ears! Give us a call at 01425 460744 or send us a message through our website to find out how we can help you.