I'm a landlord - is it worth registering as a limited company?

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An increasing number of landlords are choosing to register as a limited company to manage their portfolios.

There are a couple of different types of limited company you can set up, whether this is a trading company or a Special Purpose Vehicle (SPV). This is a company set up for the purposes of holding property and nothing else, this approach is mainly for those who are part time landlords. Whichever you choose, we look at why you might want to consider becoming a limited company, and the potential and pitfalls of doing so.

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Changes to mortgage interest relief

In the past, private landlords could claim back the interest on their buy-to-let mortgages when completing their Income Tax returns. And landlords in the higher 40% and 45% tax brackets could also claim tax relief at this higher rate.

The Government is now phasing this out over four years, so from April 2020 tax relief can only be reclaimed at the basic rate (20%). In the meantime, calculating your tax liabilities is complicated. The ‘Phasing in the restriction’ section of the Government’s official guide explains this in relatively simple terms.

What does all this mean?

Put simply, being a private landlord may be less profitable than it used to be.

Let’s look at a simplified example on a property worth £150,000, owned by a private landlord in the 40% tax bracket. They have a £90,000 Together Buy-to-Let mortgage, and rent it out at £750 a month.

Before April 2017:

  • Annual rental income: £9,000
  • Mortgage interest (assuming an interest rate of 5.99%): £5,391
  • Pre-tax profit: (£9,000 - £5,391) = £3,609
  • Tax due: (40% of £3,609) = £1443.60
  • Net profit: (£3,609 - £1443.60) = £2165.40

From April 2020:

  • Annual rental income: £9,000
  • Mortgage repayments (assuming an interest rate of 5.99%): £5,391
  • Taxable profit: (40% of £9,000) = £3,600
  • Mortgage interest relief: (20% of £5,391) = £1,078.20
  • Tax due: (£3,600 - £1,078.20) = £2,521.80
  • Net profit: (£9,000 - £5,391 - £2,521.80) = £1087.20

Naturally, the above example doesn’t take into account anything else you might also be reclaiming for tax purposes, such as sofas and white goods – but it does illustrate how the new rules affect your bottom line.

This also doesn’t cover the costs associated with running a buy-to-let – for example repairs, letting agents’ fees, cleaning, decorating and so on. This will also have an impact on the net profit figure.

How becoming a limited company makes a difference

Limited companies pay Corporation Tax, not Income Tax. And Corporation Tax rates are lower - by April 2020, they will be just 17%. (They are also changing incrementally, dropping by 1% each year until 2020.)

Using the same example as above, we can calculate the tax liability if the same buy-to-let property was owned by a limited company in 2020:

  • Annual rental income: £9,000
  • Mortgage interest (assuming an interest rate of 5.99%): £5,391
  • Pre-tax profit: (£9,000 - £5,391) = £3,609
  • Tax due: (17% of £3,609) = £613.53
  • Net profit: (£3,609 - £613.53) = £2,995.47

In this scenario, the same property is generating almost three times the net profit, just because of the different tax and ownership arrangements.

Taking an income

When the limited company owns the properties, the limited company also owns the profits – so you will probably have to pay income tax on any money you’re paid by the limited company.

When deciding how you want to be paid, you have two options:

  • Take a regular salary as an employee of the limited company, paying tax and national insurance on the income at source via PAYE.
  • Take an annual dividend, as a shareholder of the limited company, and pay tax on the dividend through Self-Assessment.

If being a landlord is your only job, you can currently (as of the 2018-19 tax year) take an income of £11,850 per year, tax-free. Conversely, the tax-free dividend allowance is £2,000 per year.

Why you might want to not register as a limited company

One of the advantages of remaining a private landlord is that any post-tax profits you make go straight into your pocket. You can use them for anything you like. So if you want to splash out on a new car, or update your wardrobe, all paid for by your tenants, you can.

Limited companies, on the other hand, must keep accounts detailing all income and expenditure, and all purchases using company money must have a demonstrable benefit to the business. You’ll need to keep receipts and accurate records of any purchase you make using company money, and be able to justify every penny spent.

 ransferring ownership of the properties

When you register your landlord business as a limited company, the company must have legal ownership of the properties in your portfolio. You can’t simply transfer them – they must be sold by you to the company, at the market rate.

That may mean you incur several costs in the process – including early repayment fees on your mortgage(s), Capital Gains Tax, and Stamp Duty.

If your portfolio contains only low-value properties that haven’t risen in value much since you bought them, these costs may be relatively small. But if you’ve owned properties for a long time and benefitted from the rising market, or they’re valued over the Stamp Duty threshold (£125,000), your costs could be significant.

A financial advisor can give you a comprehensive picture for your unique circumstances.

Be aware: any mortgages will also need to be in the name of the limited company, and some buy-to-let mortgage providers may not allow limited companies to use their services. Together, on the other hand, will.

Selling a property

Limited companies don’t pay Capital Gains Tax; instead, any increase in the value of a property is viewed as profit when you sell the property, with Corporation Tax due.

However, most individuals liable to pay Capital Gains Tax get an annual allowance. As of the 2018/19 tax year this is £11,700, and you’ll only pay tax on any gains you make above this.

Let’s imagine a buy-to-let property is sold with a capital gain (increase in value) of £27,000 in 2020, and assume the Capital Gains Tax allowance doesn’t increase between now and then:

  • A basic-rate taxpayer would pay £2,754 (18% of £15,300)
  • A higher-rate taxpayer would pay £4,284 (28% of £15,300)
  • A limited company would pay £4,590 (17% of £27,000)

In these instances, limited companies are worse off. However, this may be reversed on properties with larger capital gains, because the lower rate of Corporation Tax may outweigh the tax-free allowance.

If you’re confused

Speak to an independent financial advisor. They can talk you through the finer details of your unique circumstances, including whether or not they think it’d be a good idea.

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