Over the past few years, the buy-to-let market has faced significant changes, not least the phasing out of mortgage interest relief for most landlords. In response, many landlords have started to explore whether running their property business as a limited company might be a better option. The idea is certainly appealing – lower corporate tax rates and full mortgage interest deductions sound like compelling reasons to make the switch. However, setting up and managing a limited company isn’t without its drawbacks. From additional compliance responsibilities to potential upfront tax costs, the decision requires careful consideration.
In this blog, we’ll take a balanced look at the advantages and disadvantages of running a property portfolio through a limited company, helping you weigh up whether it’s the right move for you.
Advantages of running a landlord limited company
Managing a property portfolio means that you’re running a business, even if you hold all the property in your own name. If so, you’re technically a sole trader.
If you run a limited company to manage your property portfolio, your company owns the property. That simple difference – your company owning the property rather than you personally – has several advantages, including the following in particular.
- Tax advantages: Sole traders pay income tax, which can reach as high as 45% on the proportion of income that exceeds £125,140. Companies, on the other hand, pay between 19% and 25%, depending on their profit.
- Mortgage interest relief: Companies also benefit from 100% mortgage interest payment deductions while sole-trader landlords only get a tax credit equal to 20% of your finance costs, profits or adjusted total income – whichever is lowest.
- Liability protection: As a separate legal entity, it is your company that is responsible for its debts and obligations. Beyond what you personally invest, your personal assets are protected.
- Professional image: Dealing with tenants and other stakeholders through a limited company can enhance your professional image. Additionally, lenders may view your company structure more favourably for investment.
Disadvantages of running a landlord limited company
While there are clear benefits to forming a limited company, landlords should also be aware of the associated challenges.
For example, although corporate structures provide significant tax advantages, mortgages for limited companies often come with higher interest rates and fees.
There are also greater compliance obligations. Company owners have to prepare annual accounts, file corporation tax returns and follow more formal accounting processes. These tasks can be time-consuming and may necessitate professional assistance, adding to operational costs.
Lastly, there may be serious tax costs when setting up your limited company, because you have to officially transfer your personal property to your company – which is likely to result in a charge for stamp duty land tax.
The importance of professional advice
Deciding whether to set up a limited company for your property business is a complex decision with long-term implications. While the potential tax savings and liability protection can make incorporation an attractive option, the associated administrative workload and potential upfront costs mean it’s not the right choice for everyone. Assessing whether this structure is the best fit for your portfolio depends on your individual circumstances, including the size of your portfolio, your tax position, and your future goals.
This is where professional advice becomes invaluable. An experienced accountant or business adviser will have worked with countless landlords in similar situations and can help you navigate the pros and cons of incorporation. They’ll analyse your financial position, calculate potential tax savings, and identify any hidden costs or pitfalls, ensuring you make an informed decision that aligns with your goals.
Beyond helping with the decision to incorporate, a professional adviser can also provide ongoing support. Whether it’s handling compliance requirements, preparing annual accounts, or creating strategies for growth, their expertise can help you focus on running and expanding your property business with confidence.
If you’re considering setting up a limited company or need support with managing your property portfolio, seeking tailored advice from a professional can make all the difference.
Setting up a limited company for landlords can be an excellent strategy. Contact us for valuable assistance and advice.