Looking to invest in buy-to-let? Make sure you consider all of your options before you do.

Lauren Peters, Senior Financial Adviser

Buy-to-let investing looks less attractive than it did just a few years ago, due to the 3% additional stamp duty levied on purchases and the removal of higher rate mortgage interest relief. So, for people who still wish to invest in bricks and mortar, what’s the alternative to buying property personally?

One option is to purchase a buy to let within a property company. Setting the company up first – and then buying the property within the company – is easier and more cost-effective than the other way around.

As a director of your limited company, the money you pay into the company to purchase the property or put down as a deposit is classed as a director’s loan. You can charge the company interest on this loan and draw it back out at a later date (when there is enough money in the company to do so). There is no tax to pay on the return of capital, only the interest.

If you need to mortgage the property, the company benefits from full tax relief on the mortgage interest, unlike an individual buy to let investor who only gets interest relief at basic rate (20%). This means you can pay back the mortgage faster, allowing money to roll up in the company more quickly or giving you options to purchase more properties faster.

Once the property is let, rental payments are taxed on the company at corporation tax rates. At 19% this is considerably lower than the 40% or 45% income tax that higher earners pay on personally owned buy to let property income. Again, this can help you clear a mortgage or build up your property portfolio more quickly.

But, be aware.. if you then want to draw the money out of the company, your withdrawals will be taxed, with the exception of your annual £2,000 dividend allowance.

The general rule of thumb is; if you need to receive the rental income straight away, it’s usually better to own the property personally. If you don’t want or need the money until later on when you might be retired and a lower taxpayer, consider a property company.

With a property company, you can make a spouse or partner a director too and pay them dividends or, if they carry out work for the company, the company could pay them a wage.

Additionally, adult children could be made directors and paid for administration or other work they do for the company.

Of course, all the same risks to investing in property apply whether you invest personally or via a property company. You need to do your research, make sure you pay a fair value and be aware of potential empty periods, damage, advertising, contract fees and landlord insurance.

If you’re setting up a property company, some things will cost more. You will need a specialist mortgage and probably the services of an accountant to file your annual tax returns. It won’t be appropriate for everyone.

If you are considering setting up a property company, the best thing to do is to seek advice to discuss your options in full before you make any decisions.