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Landlords: Should You Incorporate or Form an LLC? 2019 Updates

August 14, 2019

Incorporation, or the act of forming a new corporation has become quite a trend for landlords, and for a very good reason. But is it right for you?

Here we’ll look at how many UK landlords are now buying property under company name, explain both the advantages and disadvantages of buying property through a limited company, plus give worked examples of how incorporating affects landlords’ take home pay.

We’ll also explain how to set up a business for rental property and provide a complete incorporation checklist for those who are thinking about making the switch.

incorporation tax

How many landlords are turning to this method?

According to research conducted by BVA BDRC1 in the third quarter of 2018, 45% of landlords with one to three buy-to-let properties planned to purchase a new property as a limited company, while 52% of landlords with four or more buy-to-let properties shared the same intention.

Among landlords with more than twenty properties, a full 30% had already incorporated as limited companies, and another 27% of landlords were considering transferring their ownership to limited companies.

Interestingly, MoneyWeek also reported that 44% of buy-to-let mortgage transactions are made by limited companies rather than individuals.

Why are landlords incorporating?

Okay, so clearly an increasing number of landlords are choosing to incorporate as a limited company, but why?

In short, it’s to pay lower taxes.

As most landlords will know, since the 2017/18 tax year, a restriction has been phased in to limit the mortgage interest relief available for individual landlords to reduce property rental income tax to the basic rate of income tax. April 2019 marks the third phase of the Government's plan to phase out mortgage interest relief, with landlords now only able to claim 25% of their mortgage tax relief.

More changes are on the way too: In the 2020/2021 tax year, all gross rental income will be taxed and landlords will be granted just a 20% tax liability reduction. Meanwhile, limited companies are not affected by the changes to tax relief laws and tax rates are lower for corporations than for individuals. The corporation tax is currently 19% and is slated to drop by two points in 2020.

While these tax changes do not affect landlords who are basic rate taxpayers (earning less than about £40k), they do significantly affect the tax bills of landlords who earn above the basic rate who operate as individuals (or couples), rather than through a business.

Incorporation is therefore becoming increasingly appealing to the UK’s landlords. But as is the case with all important investment decisions, there are pros and cons to incorporating which need to be carefully considered.

Here we’ll go through each point.

Why would you incorporate?

Property tax expert Ian Rankin offers a few common reasons why landlords decide to incorporate:

  • Tax payable for corporations is currently restricted to 19% and will drop to 17% in April 2020. However, for individuals earning more than £50,000, income tax is payable at a rate of 40%, so the tax advantage here is very clear

  • A lower tax burden means more income to use toward debt and future investments.
  • Incorporating offers inheritance tax (IHT) advantages. As an individual property owner, high inheritance tax bills could affect loved ones in the event of your death. Conversely, incorporating makes it possible to issue shares to younger generations so that the value of future growth is not considered part of their estate.
  • Mortgage interest restrictions do not apply to companies, but they do affect individuals.

If you hold an investment property personally, your rental earnings are combined with your other earnings, such as income from your job, and then taxed at Income Tax rates with the percentage depending on your tax bracket. If instead you hold properties in a company, your profits are liable for Corporation Tax only, which could amount to a far lower tax liability.

Of course you’ll still pay tax on dividends when you draw profits from a company but transferring your rental business to a limited corporation is generally a tax-efficient method. Here we’ll give a worked example of how incorporating will affect your profits as a landlord:

Worked Example

We asked Accounts & Legal for a worked example for a high rate taxpayer, using a £500,000 buy-to-let property with a 4% yield, a 75% loan to value interest only mortgage, and an interest rate of 3%.

incorporation tax graph

As you can see from the graph, a company would have taken home £2,884 more cash in 2019/20 at £5,434, compared to £2,550 as an individual.

Furthermore, the tax on dividends ("Dividend tax") is only paid if the cash is withdrawn from the company. If it is retained in the company and reinvested, the company would be an extra £1,653 better off again than the individual landlord in value terms.

By 2021, however, when the individual is only receiving basic rate tax relief on mortgage interest, there’s quite a big difference in take home cash. As we’ve mentioned previously, as a company you’ll pay corporation tax rather than income tax on the profit you're left with after deducting all mortgage interest, which will leave you with substantially more cash after tax. And furthermore, the rate of corporation tax is set to decline to 17% in 2020, which will widen the gap even more.

What if the interest rate was higher?

tax high interest rate

We have taken a look at what things would look like if interest rates were to be higher, and the difference in profit between an individual and a company is even more pronounced with the individual reporting a loss. The table above shows a higher rate taxpayer, on a property with a 4% yield and a 75% loan to value interest only mortgage; the difference here is that the interest rate is higher at 4%. This shows that the cost of keeping the property in your own name rather than in a company increases dramatically with the mortgage interest rate.

It’s imperative therefore you shop around and ensure you secure the lowest possible mortgage interest rate. The team at Portico Finance can help with this, drop us an email if you are shopping for a mortgage or considering remortgaging: finance@portico.com.

How do you incorporate?

To set up a limited company, register online at Companies House. Choose a company name before you begin the process. Provide an address and information about any shareholders. You will need to name one or more directors.

After establishing your business, register with HMRC for corporation tax. You have a three-month grace period to do so.

If you already own properties, you will need to transfer them to your company, which involves you personally selling those properties back to your company. The process is fairly straightforward, but you’ll need to be prepared to pay some fees: You as an individual seller must pay capital gains tax on any increase in the property’s value since its initial purchase, and your company is liable for stamp duty.

When properties are mortgaged, you may be able to transfer them under the existing mortgage. If this is not possible, you will have to pay off the mortgages and take out new ones under your company’s name. Early repayment charges and other associated fees may apply.

Buying new properties as a limited company is simple: Speak to us at Portico Finance and we can help you choose a mortgage lender that works with limited companies and select properties for your portfolio. The chief caveat is that mortgage interest rates for limited companies can often be higher than mainstream mortgage rates, however this isn't always a negative when you can offset the interest within the limited company vs personal ownership.

How much does it cost?

The cost of setting up a limited company at Companies House is £12. The cost of incorporating and ensuring ongoing compliance includes filing annual accounts and an annual return at Companies House, and filing corporation tax returns with HMRC, which typically costs £500 to £1,000 per annum.

Incorporation Checklist

This checklist will prove useful when considering whether to form a limited company.

1. Are you the sole owner of the property/properties, or do you share ownership with at least one other party? If so, you may be a partnership by de-facto, even if you have not registered with HMRC. By incorporating and having your new company take over the business of your partnership, a form of Stamp Duty relief will apply. This often (but not always) means that the company is not obligated to pay Stamp Duty on properties transferred into it from a partnership.

2. Do operating requirements associated with your rental property business – including requirements asked of contractors and agents whose services you utilise – require at least 20 hours per week? If so, you may be able to claim incorporation relief, meaning that upon transfer, capital gains in your properties are rolled into shares in your company.

3. Are your business’s total liabilities lower than your properties’ acquisition costs? If so, look into pre-and-post incorporation Capital Account Restructuring as it could have a favourable impact on your personal tax consequences.

4. Weigh the pros and cons of refinancing or retaining existing mortgage terms on your property/properties.

Cons of Incorporating

From what we’ve looked at so far, a company structure certainly looks more tax efficient.

But not everyone will benefit from holding their property / properties in a company structure – especially not those who are already paying the basic rate of tax, or those without a mortgage.

“For landlords without another source of income or who are not high rate taxpayers, retaining the rental property personally allows them to utilise their annual tax-free personal allowance and basic rate tax bands – which may well be more tax efficient.” Accounts & Legal.

There are other disadvantages of limited company ownership. Primary considerations include:

  • Incorporation relief requires that all rental properties owned by a landlord must be transferred when a rental business incorporates. This can lead to difficulties including adverse tax consequences if a landlord wishes to retain any rental properties privately, such as those occupied by family members.

  • There is no capital gains tax allowance when limited companies sell a property. Individual landlords are still eligible for CGT allowances.
  • Setting up and running a limited company comes with costs built in, including those associated with transferring properties, setting up accounts, and handling tax returns. Dividends paid by the company are taxed.Tax-free dividend allowances available to a limited company’s shareholders have been reduced from £5,000 to £2,000. 

Paul Tait, Director of Portico Finance makes comment on the options:

"Buy to let Mortgages in a personal name start from 1.40% and in a SPV 2.59%. Buy to let can be on interest only and often usually always are to fit the lenders affordability stress tests and to make the investment viable with less focus on paying the debt down compared to a residential mortgage for the home you live in.

Worth noting a SPV- Special Purpose Vehicle are different to ltd companies. Lenders prefer SPV's as it’s clear that company can only be used for 1 thing which is holding property whereas a ltd company in the true sense of the word can do many things, not just hold a property.

Due to the wide range of options available and depending on your Portfolio/ Property goals it’s best to speak with a Mortgage broker who can run through the different financing options for your current or future property."

Speak to Portico Finance who can help

If you’d like to remortgage and get an up-to-date valuation on your rental property, or if you’d like to know how much it’s worth for sale, give us a call on 0207 099 4000 or click here. Of course, we would advise you to seek professional advice before making any financial decisions. Drop Portico Finance an email at finance@portico.com if you would like to find out more. !!!!!!


Disclaimer: As is the case with all important investment decisions, the decision whether to incorporate as a limited company depends on a customer’s individual circumstances. There are a number of factors that need to be considered and customers should always consult a suitably qualified tax accountant and seek independent legal advice beforehand.


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