Why are more landlords setting up limited companies?

23 October 2023

Limited company structures are growing in popularity for landlords. Here's an overview of why that may be.

More landlords than ever are setting up their business as a limited company, according to Hamptons. Its data shows that seventy-four percent of landlords buying a buy-to-let property in 2023 did so under a limited company. But why is this becoming a popular choice?

Agents know that lettings is a tough market. Increased compliance obligations are pushing landlords to consider the future appeal of investing in this industry - although the government is starting to drop hints that it's softening its approach to landlords, having scrapped plans to upgrade EPC requirements.

Mortgage costs are still high, and the repeal of section 24 means that mortgage interest can't be deducted from the taxable income on a property.

Limited companies offer a potential solution to this state of play.

A taxing time for landlords

“The rush to incorporate started six years ago and the rise in interest rates has just exacerbated this. It’s become an even more pressing issue,” says Sean Randall, Partner at Blick Rothenberg.

Setting up under a limited structure means paying corporation tax rates, which are lower than for income tax. It also means that landlords can deduct mortgage interest costs from the company's income.

Finding a buy-to-let mortgage as a limited company may also mean the ability to borrow more with lower stress tests - but often at more expensive rates than on an individual basis.  

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A framework for investors

Generally speaking, if a landlord owns a portfolio of properties, then they're likely in a higher tax bracket. These high earners could benefit more from the lower tax rates under a corporate structure.

Limited companies can also be beneficial for those looking to grow their portfolios. Profits can be stored in the corporate structure.

That means they can be reinvested without paying income tax, so it can be a beneficial structure for landlords looking to grow their portfolio.

Data from Paragon Bank shows that many landlords may already be taking advantage of this. The average number of properties held under a limited structure sat at 12.3 in the second quarter of 2023. This was up from an average of 7.8 in the last quarter of 2021.

The alternative costs

On the other hand, if you still need to use the profits held in your company to add to your own personal income, you'd be taxed again on any money you take out of the company.

If you need to sell a property, you don't benefit from capital gains tax allowance, you'll have to pay the minimum corporation tax rate of 19%.

Plus, there would of course also be more administration, with financial records and accounts to keep on top of too.

Operating under a limited company is therefore a long game for landlords. Those with larger portfolios, or looking to reinvest, may wish to consider a limited company.

Those with one or two properties may find that it's more time intensive and costly than expected.

This article is intended as guidance and is not legal advice. You should consult with a solicitor and/or tax advisor before making any investment decisions. 

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