Pros and Cons of Owning a Holiday Let in a Limited Company

In recent weeks, we’ve seen a surge in interest around the discussion of “Should I own a holiday let in a limited company (sometimes called a Special Purpose Vehicle or SPV for short)?”. This has been a direct result of new government regulations announced in March 2024, which will see the removal of the furnished holiday let (FHL) status from holiday let properties. As such, holiday let owners will be unable to offset their mortgage interest against their profits – assuming that the property is held in their personal name.

What’s one solution to solve this problem? To own the holiday let through a limited company, instead of your personal name. That being said, this isn’t a straightforward decision and one which shouldn’t be made in haste, as it’s a choice that can have a significant impact on your financial plans and goals.

Setting up and running a limited company to own your holiday let property can be a sensible strategy for many people, but it’s not for everyone. In this article we explore some of the pros and cons, in order to help present a balanced view between the two options.

Pros

Buying a holiday let property via a limited company can offer several benefits, particularly for higher rate taxpayers and those planning on building a property portfolio. Here are some of the key pros:

The ability to offset mortgage interest against profits

Interest payable against a loan, such as a mortgage, is a valid business expense and can be deducted from your holiday let profits for the purposes of calculating tax. Depending on the rate of interest on the mortgage, this could generate significant tax savings.

You decide when to extract profit

A limited company is regarded as its own legal entity and as such, any profits generated within it will remain within the company wrapper unless you decide to do something different. This is not the case when you hold property in your personal name; in this situation, you have no choice but to declare profits in the tax year they are generated.

As a director of a limited company, you have the flexibility to determine how and when you manage your profits, for example:

• Reinvesting in more properties
• Contributing to your pension pot
• Paying yourself a dividend to utilise your income tax limit and avoid entering a higher tax bracket
• Paying yourself a salary at times that suit you

Indeed, if you funded your first property purchase by using a director’s loan, and placed your own money into the business, you can request that your limited company repays this to you, tax-free, from its available reserves.

This can be highly advantageous, especially for those who are already in the 40%+ income tax bracket. By keeping profits within the limited company, you can take advantage of lower tax rates and build up positive reserves over time.

Expanding your property portfolio

As a consequence of the point above, if you are lucky enough to have sufficient income streams, separate to your investment properties, then you can allow your limited company to retain all of its profits to help fund future property purchases, without having to declare those earnings when you file your tax return.

This approach can legitimately boost your wealth creation and provide a means of expanding your property portfolio faster.

Inheritance planning

Ability to have children as shareholders (subject to age) in your limited company provides an effective means of managing inheritance tax, as it makes it easier to transfer the company to your family in the future.

Since the property remains owned by the limited company, it may also be shielded from stamp duty, inheritance tax, and capital gains tax liabilities, providing even more additional protection for your investments.

Cons

Whilst owning a holiday let through a limited company can be beneficial for some, if you are only planning on marketing out one or two holiday let properties, or if you don’t have an alternative income stream and you plan on extracting all the profits on a regular basis, then it may not be the best choice for you.

Below are some of the potential downsides to using a limited company, which you should consider before making any decisions:

Higher mortgage interest rates and fewer lenders

As of March 2024, there are approximately 31 holiday let mortgage lenders in the market.

Of those select lenders, only 11 (36%) offer SPV or limited company holiday let mortgages. This is because lenders see such mortgage loans as riskier and more complex, involving additional legal and administrative checks and reviews.

This means that you have far less choice when it comes to finding a lender, which can really cause issues if your circumstances are complex and if in the past, you have found it difficult to secure a mortgage.

Fees also vary quite a lot between limited company and personal name mortgages. Typically, the rate of interest on the loan is between 0.3% and 0.5% higher for limited company applications and usually have higher fees associated with the loan, that can amount to £1,000 or higher.

Therefore, whilst there is a lot to say about the ability to offset your mortgage interest against letting profits, the actual amount of mortgage interest you will pay is also an important consideration.

No capital gains allowances

When you sell your holiday let property from your limited company, any capital gains made are treated as simple business profits and as such, you will have to pay corporation tax on the full gain as normal (after offsetting any allowable costs).

This is unlike properties held in your personal name, where you only have to pay capital gains tax on gains above your personal tax allowance, which is £6,000 for the current tax year of 2023/24 and £3,000 for the following tax year 2024/25.

Double taxation of income

Profits held within a limited company are subject to corporation tax, which can range from 19% to over 25% as your profits rise.

If you would like to take profit out of the limited company and into your personal name (assuming you don’t have an outstanding director’s loan), then you can take money out by way of paying yourself a salary or a dividend, and these routes are both covered by the income tax regime.

This situation is known as double taxation, and it occurs when the company pays corporation tax on its profits and then you (the directors and shareholders) pay additional income tax on the amounts you actually received from these taxed profits.

The amount of income tax you pay will depend on your marginal tax rate at the time and is calculated via your tax return each year.

The burden of running a company

By law, limited companies must maintain accurate and up-to-date financial records, including detailed accounts of all income and expenses related to the holiday let.

This usually includes everything from guest rental income and agent fees (such Airbnb or Travel Chapter), to repairs and maintenance costs, housekeeping bills and utilities.

In addition to this, SPVs are also required to complete and submit annual accounts, confirmation statements, corporation tax computations and corporation tax returns, all of which cost money and can be time-consuming and complex.

Furthermore, limited companies normally have at least one company director, who will be listed on Companies House and will carry out the role in compliance with all its fiduciary responsibilities as described in company law. For some, this might not be a role they wish to take on.

Table summary of key tax differences

The following table presents, side by side, the key tax differences between the two models of holiday let ownership This is a highlight of the main taxes and is not intended to be a complete or exhaustive list.

Tax Type	Personal Ownership	LTD Ownership
Tax when you buy	When you buy the property in your name you have to pay the regular stamp duty plus a 3% additional property surcharge	When you buy the property in a limited company, you have to pay the regular stamp duty plus a 3% additional property surcharge
Tax when you sell	When you sell the holiday let in the future and make a profit on that sale, then you get between £0 – £3,000 tax free gains from 24/25 tax year onwards, with gains over this rate taxed as: Basic rate taxpayer: 18% Higher and additional rate taxpayer: 24% (this recently changed from 28% following the government’s announcement in March 2024)	When you sell the property from your limited company, it’s still treated as profits as there is no such concept of capital gains in a company. Therefore, the tax applicable would be 19-25% corporation tax. Note: the higher the company profits, the more the tax rate tends towards 25%
Tax for ongoing rental profits	You calculate your rental profits by deducting all allowable expenses from your rental income. From April 2025, you will no longer be able to deduct your mortgage interest. The profit figure for above is declared to HMRC via your personal tax return and the rate of tax you pay will depend on your marginal tax rate at the time. For example, if you are a basic rate taxpayer you pay 20%, if you are a higher rate taxpayer you pay 40% and if you are an additional rate taxpayer you pay 45%. There are additional income tax complexities around the removal of your personal allowance that happens when you earn between £100,000 and £125,000 which lends itself to a 60% tax rate – to be avoided if possible!	In a limited company, your rental profits are determined by the overall profit in your company, after including all relevant business costs including mortgage interest. Those profits are then taxed at 19-25% corporation tax. The taxed cash will remain in the limited company, and you may be taxed again when you pay it out to the shareholders and directors by way of salary or dividend (see section above called ‘double taxation’). Note: the higher the company profits, the more the tax rate tends towards 25%.
Inheritance tax	40% above £325,000 with a seven-year taper on gifts	Same but on the value of shares held

Bringing it all together – what’s best for me?

In summary, owning a holiday let in a limited company is typically tilted towards those investors who are already in the higher personal tax bracket; who don’t have a regular need to extract money from their holding company to pay towards their day-to-day living; and who have plans to grow their property portfolio and purchase more than one or two holiday let properties.

Each circumstance is different, and the tax implications associated with purchasing rental properties can be complicated. We always advise seeking independent advice from professionals before making any significant decisions.

At a minimum, you should speak to the following three key advisors:

• Your holiday let mortgage broker
• Your accountant
• Your solicitor

We hope you found this article interesting and if you have any questions, please get in touch with us here at Holiday Cottage Mortgages by using the contact us section of our website.