An increasing number of professional Landlords are setting themselves up as a limited company; this year, 64% of landlords who own four or more properties and are planning to expand their portfolio are opting for a corporate structure. Even those with smaller portfolios are choosing a corporate setup; across the buy-to-let market as a whole, 44% of landlords will buy new buy-to-let purchases through a limited company in 2019.

Could this be the best option for you? That very much depends; whether to incorporate or not must be decided very much on a case-to-case basis, so professional advice should always be sought before making opting to become a limited company.

As a starting point, we take a broad look at the advantages and disadvantages of setting yourself up as a limited company.

Why are more landlords incorporating?

 Landlords in the higher rate income rate bracket used to be able to claim full relief on costs incurred on a finance expense (interest on a buy-to-let mortgage is usually the largest, but loans and mortgage fees could also be considered) until 2017. In the current tax year landlords are only able to claim 25% of finance costs, and from April 2020 you will not be able to deduct any finance costs from the income of a buy-to-let property.

 But a corporate setup allows you to off-set your buy-to-let mortgage interest against your profits which are taxed at the corporation tax rate of 19% – reducing to 17% in April 2020 – rather than the higher tax rate of 40% (or 45% over £150,000).

 While more landlords are choosing to set themselves us as a company because of reductions in landlord tax relief, it is certainly not always the most cost effective option. A tax advisor will be able to give you the right guidance.

Does it cost money to become a limited company?

Yes, there are costs involved in setting yourself up as a limited company and as such it is important to seek specialist advice before making the decision.

Many landlords are attracted to a corporate setup as it is considered a more tax efficient option, but the running costs need to be weighed up against any tax relief you may benefit from as a corporate business.

Costs will include an incorporation fee and ongoing accountancy fees; you will need to keep meticulous accounts and unless you’re confident in bookkeeping, increased compliance around self-employed tax regulations means it is usually more cost effective – and safer – to employ a professional.

How will it affect a buy-to-let mortgage?

Borrowing costs are usually higher on a corporate level; personal buy-to-let borrowing still usually offers the best rates and choice. Also bear in mind that when you sell a property, there is no Capital Gains Tax allowance. You may also be liable for dividend tax if you withdraw money from the company.

Can I transfer my existing properties to company structure?

Landlords with existing properties will be liable to capital gains tax liability based on the market value of the property, with a rate of 28% applied on the gain so if you have several properties, this option may be financially prohibitive.

You may be liable for some tax relief if you have ever lived in the property, but again, this needs to be looked into by a professional.

If you run your rental business as a fully functioning business you may be entitled to incorporation relief which would defer some or all of such capital gains. But this is a delicate area and one HM Revenue and Customs (HMRC) are not unknown to challenge.

In addition, Stamp Duty Land Tax (SDLT) will be payable on the market value of the properties – anything up to 15% of the value being transferred.

Multiple dwellings relief may be available if several properties are being transferred, which could potentially reduce the SDLT liability.

If at least six properties are being transferred, then the lower non-residential rates of SDLT would apply.

This is very much an overview, and there are other considerations such as Annual Tax on Enveloped Dwellings (ATED), profit extraction and corporation tax on property disposals – to weigh up if you’re considering transitioning to a corporate structure so seek advice before jumping in.

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