Becoming a property landlord is something that many people aspire to. The property market, as a whole, is seen as a sound investment. Investing in property is a great idea for many reasons, mainly leverage, as over time the value of the property is more likely to increase than decrease. A house historically tends to be a stable asset and letting it provides a great extra income.
However, the landlord sector is becoming increasingly complex with landlords, both residential and commercial, facing increasing regulatory and legislative challenges. Increases in buy-to-let stamp duty, income tax relief restrictions and capital gains tax changes have all been problematic and costly. Factor that in with the many issues landlords can face day to day such as dealing with problem tenants, chasing rent arrears or paying for maintenance and repairs. The challenges, not to mention expense, can soon mount up.
Despite these challenges, the sector is posting strong growth. It’s estimated that there’s nearly 2.6 million landlords operating in the UK, and that number has grown by 2.4% over the last 3 years.
There’s also significant growth in the number of landlords that are moving away from personal ownership and instead operating as limited companies, or operating part of their portfolio through a limited company. But what are the main advantages of limited company ownership that are driving this increase in landlord incorporation?
Take Advantage of Improved Tax-Efficiency
Operating your portfolio through a limited company can provide significant benefits from a tax perspective. If you own, or plan on owning, multiple properties or pay taxes at the higher rate, you’ll find that tax savings can often be made. These savings can sometimes be significant!
When you operate as a non-limited company, you own your property (or properties) in your name. This means that any profits from your rentals will be added to any other earnings you have, such as the salary from your job, and will be taxed at the relevant income tax band.
Profits from rental properties held in a limited company are taxed at the current corporation tax rate of 19% rather than the personal tax rate. If your taxable income is between £12,571 and £50,270 you’ll be taxed at 20% at the basic rate. If you make between £50,271 and £150,000 taxable income you’ll be taxed at 40% at the higher rate
If you make over £150,000 of taxable income will be taxed at 45% at the additional rate. Any income up to £12,570 is your personal allowance and isn’t taxed. So significant tax savings can be made if your rental income is taxed as corporation tax rather than income tax.
As director of your limited company, you also have significantly more flexibility in terms of your remuneration and what you do with your company profits. You can pay yourself through dividends which are taxed at a much lower rate than income tax which can ultimately increase your take home pay. You could also use your profits to top up your pension fund as you plan ahead for the future.
Expand Your Property Portfolio More Easily
All landlords aim to grow their business and expand their portfolios and if you operate as a limited company, doing this in many cases is much easier. Profits can be retained in your company to pay for future property purchases without them being subject to income tax. Tax would only be levied if you were to draw the profits out of the business. So by retaining the profits within the business, you can increase your portfolio more quickly, pay less tax and increase your income.
Limited Liability
Limited liability means your personal assets, such as your home, car and investments should be protected in the event your company runs into financial difficulties or becomes insolvent.
As a shareholder, you aren’t personally liable for the debt of the company due to it being treated as a completely separate legal entity from the directors and owners. This significantly reduces the financial risk and gives greater peace of mind. There’s an increased level of risk for landlords operating as non-limited companies as they’re personally liable for any debts and losses incurred. This means that personal assets could be at risk from creditors if the business was to go bankrupt.
What Factors Should be Considered?
There’s more responsibility involved with running a limited company compared to a sole trader set up. Limited companies are more rigorously monitored and vetted and it’s vital therefore that accurate accounting records are kept. Limited company accounts are more extensive than personal returns and HMRC can issue penalties and fines for late or inaccurate submissions.
For limited companies, an annual return must be filed with HMRC as well as articles of association and an updated memorandum. Having the right landlord accountant on your side can be a great help in this area!
Every landlord’s situation is unique and should be considered on a case by case basis. There are a number of key questions to consider before deciding to incorporate as a landlord.
- Do you already have a portfolio or are you just starting out?
- Do you let, or plan to let, commercial or residential property?
- How much money has been borrowed?
- How much profit will be taken from the business for personal use?
- What are the tax and other associated costs to transfer an existing portfolio into a limited company?
- How much income tax do you pay?
Your own dedicated expert property accountant will get to know you and your business inside out and will advise you if going limited is right for you. We can then incorporate your business and advise you on the most tax-efficient way to structure your remuneration to increase your take home pay.
Whether you’re about to take your first tentative steps into property investment, or you’ve already built up a large and profitable portfolio, Gorilla Accounting will help you to manage your buy-to-let finances efficiently and effectively, allowing you to focus on the day-to-day running of your business. Request a call back today for expert advice and to find out how we can help you.
