As a landlord, should you set up a limited company?

Here are the pros and cons

Have a read through our helpful guide on how to set up and run a limited company...

We’ve said goodbye to mortgage interest relief – which was phased out in 2020, and more and more buy-to-let landlords are wondering whether to set up a limited company to hold their investment properties. Although incorporating a business is becoming increasingly popular, it isn’t without its drawbacks. So, is it for you? Let’s find out…

What are the tax benefits of setting up a limited company?

Setting up your rental property in a limited company can be a smart choice. The limited company becomes the legal owner of the property so you no longer have to pay income tax on your rental profits. Instead, you’ll pay corporation tax, which is at 19% but is set to increase up to 25% from 2023. So, as you can see, if you’re a higher earner and in the 40% tax bracket, having your property in a limited company could dramatically lessen your tax bill.

Can I offset my mortgage payments in a limited company?

You’re probably aware that one of the biggest changes to hit the investor market was the removal of Section 24 mortgage interest relief. UK landlords no longer receive tax relief for the mortgage costs of their buy-to-let properties. They now only get a 20% tax reduction on the mortgage interest costs. So, effectively, buy-to-let investors are paying more tax than they did before. A limited company is not affected by the issues surrounding mortgage interest relief so all of the mortgage interest costs may still be offset against the rental income of the property portfolio.

Do I still need to pay stamp duty if I set up a limited company?

Yes. Unfortunately, there’s simply no escaping stamp duty tax. Just like property bought in your personal name, your limited company must pay Stamp Duty Land Tax as well as the current 3% second home surcharge.

How to set up a limited company?

In the UK, all limited companies must be registered at Companies House, and the information about Limited Companies is held on a public register available for anyone to see. Setting up is actually quite easy – there’s a small fee and you’ll need to provide some basic information and the signatures of the director and witness.

Before you incorporate, you will probably need to consult both a solicitor and your accountant. You’ll need to supply annual accounts to Companies House, and inform them of any changes to your company e.g. new employees. There will probably be a lot more paperwork that you need to be ready for. You’ll have to file a PAYE salary scheme, a corporation tax return, and also a workplace pension if you hire staff. You’ll also have to file your own self-assessment tax return and your company’s accounts so you'll probably need a good accountant to handle this for you. Before deciding if incorporating is a good idea, you should sit down and factor in these additional fees.

Drawbacks of setting up a limited company

  • Limitations on mortgage availability fewer mortgage providers will lend to a company, so your choice of mortgage deals won’t be as broad and competitive as before. Getting a good mortgage advisor can really help source the best deals for you.
  • Disclosure – this isn’t the end of the world but just something to be aware of. Companies have to disclose all information about their business, including profits, salaries and margins.
  • Cost of transferring properties into the company – this is for those of you who already own properties and are looking to move them to a limited company. Moving a property held in your own name into the ownership of your company means effectively you’ll need to go through the sale and purchase process, which means a capital gains tax and stamp duty bill – ouch. Will this cancel out any savings you stand to make? Something for you to think about…

Conclusion

On the whole, it seems that if you only have one or two properties then keeping the properties in your personal name and dealing as a sole-trader works better. On the other hand, if you’re near the tax threshold of £50,000 or you plan on building a large portfolio then perhaps it’s worth exploring putting your properties into a limited company. We’d like to highlight that this is not tax advice and the tax rules can be complex. We always recommend that you explore your individual circumstances with a professional tax advisor.

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