Should landlords set up a limited company? The pros and cons explained

Published: 18/04/2017

These are taxing time for landlords, pun very much intended.

Landlords have always enjoyed a significant tax relief on their buy-to-let income. That is, landlords have only paid tax on the difference between their rental income and the amount of mortgage interest they paid.

However, as of April 6, landlords will have to pay tax on their full turnover. Tax relief will be capped at 20%, even for landlords who pay 40 or 45% tax.

For example, a landlords with an interest-only buy-to-let mortgage paying £1,000 a month can claim up to £450 of it back from the government in tax relief.

Under rules coming in from January next year, this will reduce to just £200 by 2020 - leaving landlords scraping around for an extra £250 a month to cover mortgage costs.

As a result, many landlords are now looking to buy properties as a limited company rather than as an individual. Essentially meaning landlords are selling their properties back to themselves.

They can claim the costs of running their buy-to-lets as an 'allowable expense' - effectively writing off the cost of mortgage payments, wear and tear and maintenance, letting agents' fees etc.

PROS

• As a limited company you’ll pay corporation tax rather than income tax thereby bypassing the changes to tax relief altogether

• Corporation tax on taxable profits is currently set at a rate of 20 per cent, but this is due to fall to 18 per cent by 2020

• Limited company buy-to-let is not subject to the PRA rules meaning landlords operating this way can actually borrow more than individual landlords

• If you consolidate a number of individual buy-to-lets into one loan facility, you may be able to lock in a better interest rate or look to include a capital raise at the same time to purchase further investment properties

CONS

• Setting up and running a limited company can be very time-consuming

• Changes to the tax-free dividends company directors can take out of a business account announced recently in the Spring Budget will have an impact

• Selling a buy-to-let property and repurchasing it through a limited company triggers a capital gain if the value of the property has risen since its original purchase

• Stamp duty is also payable on the re-purchase by the company - and since April this year all buy-to-let purchases are subject to pay a 3 per cent surcharge on the rate of stamp duty owed

• Changing the ownership of the property from personal to company also means, usually, that the mortgage contract has to be changed. This can in turn trigger early repayment charges to redeem an existing mortgage if the term is not up, a remortgage fee for a new product, legal fees and a valuation fee

Emma Coffey, Head of Sales at Goldsmith Williams Solicitors, comments:

“It is imperative that landlords don’t rush into decisions without being fully aware of the pros and cons. My biggest piece of advice would be to enlist the assistance of an experienced tax advisor as soon as possible. Look for someone with solid experience, the right qualifications and professional indemnity cover. Get the advice in writing and consider your options properly.

“The tax relief changes are being gradually phased in over the next few years, so there is certainly no need to panic!

“If you do decide to make the move to a limited company, it is a fairly straightforward process, although you will need a solicitor for yourself and your property company. It is always best to choose a solicitor with plenty of property experience to ensure the process runs as smoothly as possible.”

Content correct at time of publication.