Further to the above. Anyone here setup a limited company to reduce income tax on a rental?
Generally the reason people do this is:
1. If you're a 40% taxpayer you only get 20% relief on the mortgage interest. The company gets normal Corporation Tax relief on mortgage interest so the tax is much lower.
2. If you don't need access to the rental income straight away, the company can save up profits after paying just 19% tax. You pay tax on dividends only when the profits are distributed. Any money you put into the company to cover the deposit can be repaid to you tax free though.
Note that if you do extract all profits as dividends then the effective rate you pay between corporate and personal tax is (32.5% * 100/81) = 40%. The difference is you've got full relief for mortgage interest.
3. When you sell the property you'd generally sell the company instead. CGT on residential property is 28% but for shares it's 20%.
It only works if you don't already own the property as transfering ownership from personal to company incurs stamp duty which wipes out any tax advantage.
The cost of setting up and running the company, especially for just one property, would offset the tax advantage you get.
Mortgages for ltd companies are a bit harder to come by and might have higher interest rates.
Whether it works for you would depend completely on your numbers.