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Buy to Let: Should I incorporate as a limited company?

Buy to let, Landlords, Tax

Landlord, tax, tax rate, tax relief

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Buy to Let: Should I incorporate as a limited company?

In 2015 it was announced that mortgage interest tax relief would be gradually phased out by April 2020. It means that by that date landlords will no longer be able to deduct their mortgage costs from their rental income.

In the 2019/2020 tax year, landlords will only be able to claim 25% of their mortgage tax relief and should therefore start planning accordingly. In the 2020/2021 tax year, all of a landlord’s gross rental income will be taxable and landlords will instead be given a 20% reduction in their tax liability.

The reduction has led to a sharp rise in the number of landlords investigating whether they should transfer their existing buy to let properties to, or purchase new properties through, a limited company structure.

As is the case with all important investment decisions, there are pros and cons to incorporating as a limited company which need to be carefully considered. Landlords should always consult a suitably qualified tax accountant and seek independent legal advice beforehand.

Pros of limited company ownership

Limited companies are unaffected by the tax relief changes and can continue to deduct interest from the rental income to calculate the profit on which tax is calculated. This could be favourable for higher and additional rate taxpayers.
Limited companies pay a lower tax rate than individuals. Corporation tax is currently 19% compared to the rates for individuals (20% basic rate, 40% higher rate and 45% additional rate).
Limited company owners pay no income tax on existing profits which means they could reinvest the funds into developing a buy to let portfolio. Corporation tax on the profits earned from any additional properties will still need to be paid.
As the company owns the property, it is more simple to change ownership. The company’s directors or shareholders can be changed to suit the situation and changing ownership via Companies House forms is more simple than changing ownership of a property by sale.

Cons of limited company ownership?

The costs of transferring properties across to a limited company need to be taken into consideration. These include both Capital Gains Tax (CGT) and Stamp Duty Land Tax.
There are also additional costs associated with setting up and running a limited company. These include preparing accounts and tax returns. It is also worth noting that tax is also payable on any dividends paid by the company.
There’s no capital gains tax allowance for limited companies when selling a property. Individual landlords are eligible for a £11,700 CGT allowance.
The tax-free dividend allowance shareholders of limited companies can claim has been reduced from £5,000 to £2,000 (taxed at 7.5% basic rate, 32.5% higher rate and 38.1% additional rate thereafter).

NOTE: As is the case with all important investment decisions, the decision whether to incorporate as a limited company depends on a customer’s individual circumstances. There are a number of factors that need to be considered and customers should always consult a suitably qualified tax accountant and seek independent legal advice beforehand.

Research conducted by BVA BDRC1 in the third quarter of 2018 showed:

45% of landlords with one to three buy to let properties said they intended to buy a new property as a limited company

52% of landlords with four or more buy to let properties said they intended to buy a new property as a limited company. That’s a 12% increase over the previous six months

30% of landlords with 20+ properties have already transferred ownership to a limited company

27% of landlords with 20+ properties are considering transferring ownership to a limited company

How can Precise Mortgages help?

No difference in rates between individual and limited company products
Up to four directors/shareholders allowed
Up to 20 buy to let loans per individual with a combined value of £10m (unlimited with other lenders)
HMO, multi-unit, holiday lets and Refurbishment % Buy to Let options available
No limit on the number of director dependant shareholders under the age of 21
First time landlords with no residential property accepted

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