For many landlords, deciding whether to register as a limited company can be significant. It impacts tax liabilities, legal responsibilities, and potential profits.
Understanding the right time to make this transition is important to maximise benefits and minimise risks.
Understanding the basics
Being a landlord involves various responsibilities, from maintaining properties to managing tenants. One critical decision you’ll face is the structure of your property business. There are several structures to consider, but the two most common options are operating as an individual or as a limited company.
Individual vs. limited company: The key differences
Operating as an individual means all income from your rental properties is taxed as personal income. This can lead to higher tax rates, especially if you have substantial rental income. In contrast, registering as a limited company offers the benefit of corporation tax, which is currently lower than the higher personal income tax rate in the UK.
Tax implications
One of the primary reasons landlords consider forming a limited company is the potential tax benefits. As of 2023, corporation tax rates are set at 19% (small profits rate: companies with profits under £50,000) and 25% (main rate: companies with profits over £250,000)whereas higher rate taxpayers can pay up to 45% on rental income. This significant difference can lead to substantial savings. Additionally, limited companies can offset mortgage interest against rental income, a benefit that individual landlords have lost under recent tax changes.
Consider your long-term goals
Your long-term objectives play a vital role in deciding whether to incorporate your property business. A limited company might be advantageous if you plan to grow your portfolio significantly. It allows you to reinvest profits back into the company at a lower tax rate. Moreover, selling properties can be more tax-efficient, as companies benefit from lower capital gains tax rates.
Financing considerations
Securing finance as a limited company can be more challenging than as an individual. Mortgage lenders often require higher deposits and offer less favourable interest rates to companies. It’s essential to weigh up these factors against the potential tax savings. Some lenders, however, are beginning to offer competitive rates to limited companies, so it’s worth shopping around.
Administrative responsibilities
Running a limited company involves more administrative work than operating as an individual. Companies must file annual accounts, submit corporation tax returns, and adhere to company law requirements. This added complexity means more time spent on compliance or additional costs if you hire professionals to manage these tasks.
Legal protections
One significant advantage of registering as a limited company is its legal protection. As a limited company, your personal assets are typically protected if the business faces financial difficulties. This limited liability can provide peace of mind, especially for landlords with substantial property investments.
The impact of Section 24
Section 24 of the Finance Act 2015 phased out mortgage interest relief for individual landlords, meaning you can no longer deduct all your mortgage interest from your rental income. This change has prompted many landlords to consider the limited company route, as it still allows for full mortgage interest deduction.
Case study: Individual landlord vs. limited company
Consider a landlord earning under £50,000 in rental income. After mortgage interest and other deductible expenses, they might end up paying a significant portion in income tax as an individual. In contrast, a limited company earning the same amount would be taxed at the corporation tax rate of 19%, significantly reducing the tax burden. Over time, these savings can be reinvested to grow the property portfolio.
Making the switch
If you decide that forming a limited company is the right move, it’s crucial to understand the process. Incorporating a company is straightforward, but transferring properties can be more complex. It may involve capital gains tax and stamp duty land tax (SDLT) liabilities. Seeking professional advice is essential to navigate these potential pitfalls and ensure a smooth transition.
Help is available
Deciding whether to register your property business as a limited company depends on a number of different factors, including tax implications, long-term goals, and administrative capacity. While there are clear benefits, especially regarding tax savings and legal protections, the decision must align with your circumstances and business objectives.
At Smith Butler, we understand the intricacies of property business structuring and are here to help you make informed decisions. Our experienced team can provide personalised advice and support, ensuring you choose the best path for your property investments.
Reach out today to discuss your options and take the next step towards optimising your property business.