The number of landlords setting up limited companies to hold and rent properties has increased dramatically.
This change means around 40% of new buy-to-let purchases are now made through company structures.
The reason for this is the tax relief changes introduced in 2015, known as Section 24, which changed how landlords are taxed on rental income.
What is Section 24?
Section 24 fundamentally changed the tax relief system for landlords. Before these changes, landlords could deduct mortgage interest and other expenses/costs from their rental income, only paying tax on the profit. Under the new legislation, landlords are taxed on the total rental income but can still claim back some mortgage interest costs, capped at the basic income tax rate of 20%.
Due to the above, many landlords have decided it’s best to form limited companies to reduce their tax liabilities.
Advantages of a Limited Company
Reduced Tax Bills
Forming a limited company can lower tax bills. When properties are owned by a limited company, the rental profits are subject to corporation tax, currently set at 25%, instead of income tax. For landlords who pay 40% income tax, this means significant savings.
Reduced Personal Liability
In a limited company, the business's finances are separate from the individual/s. This protects the property portfolio from potential issues with lenders more effectively than personal ownership.
Easier to Transfer Ownership
Transferring property ownership within a limited company is easier and can help avoid some tax liabilities like stamp duty, inheritance tax, and capital gains tax.
Disadvantages of a Limited Company Structure
Less Efficient for Lower Rate Taxpayers
For accidental landlords, landlords with only one property, or those who fall into the basic income tax bracket, Section 24 has minimal impact. In this case, forming a limited company might not be tax efficient. However, if their income increases or portfolio expands, it’s certainly worth reviewing again.
Cost Burden of Moving from Existing Private to Company Ownership
Existing properties must be sold to the limited company, and therefore are subject to stamp duty. Many landlords choose to keep existing properties under personal ownership and buy new ones through a new company.
Increased Responsibilities and Admin
Running a company comes with additional responsibilities, such as submitting company tax returns and maintaining/storing financial records for HMRC. Hiring an accountant will, of course, make this easier but will incur charges.
Potential Increase in Tax
Companies pay corporation tax on any profits, but any salary or dividends are subject to income tax in addition.
Higher Mortgage Costs
Mortgage rates are usually higher for companies compared to personal buy-to-let mortgages with fewer options available on the market.
If you require more advice on all aspects of buy-to-let, please contact [email protected]. We would also be more than happy to arrange a financial health check or provide advice on buy-to-let financing with our trusted partners at Broadland Financial Services.