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Nov 29 2023

Should buy to let landlords incorporate?

Owning buy-to-let property can be highly lucrative, with landlords typically seeking to expand their portfolio and income. However, some landlords are “accidental” landlords as they may have inherited a second property, or decided to rent out their own property when they marry or move in with a partner. 

There are a number of financial considerations that come with becoming a landlord, and one of these is whether to own and rent the property personally or whether to own many properties through a limited company. 

In this blog, as experienced accountants, we’ll break down the pros and cons of incorporating a buy-to-let business. 

What is an incorporated landlord? 

An ‘incorporated landlord’ refers to an individual who is a shareholder in a limited company which owns property that is being rented out. This means that, unlike with an unincorporated landlord, the rental income is not generated in the landlord’s name. The company is a separate legal entity with limited liability. 

Pros of incorporation for landlords

Incorporation can offer many financial benefits for landlords from a tax and security perspective. 

Improved tax efficiency 

One of the main benefits of incorporation is the ability to make tax savings. By incorporating, the company becomes the legal owner of the properties. As a result, the rental profits made by the properties are no longer subject to income tax. Instead, they will be subject to corporation tax which from April 2023 is charged at rates of 19% – 25% depending on your profit levels. This could be a favourable option if the shareholder does not need to withdraw the income from the company, especially as landlords are often in the higher rate tax band. In the UK, these tax bands are: 

  • Personal allowance (0%) – up to £12,570 taxable income. 
  • Basic rate (20%) – between £12,571 and £50,270 taxable income. 
  • Higher rate (40%) – between £50,271 and £125,140 taxable income. 
  • Additional rate (45%) – more than £125,140 taxable income. 

Reduced financial risk 

Another benefit of company property ownership is limited liability, as your liability is usually limited to the value of your shares. This offers protection to the landlord from being affected by anything that might go wrong within the business. However, lenders often require personal guarantees and mortgages will always be secured on the properties to which they relate. By contrast, a landlord who owns the properties under their name has unlimited liability which puts the risk wholly on them.  

Ease of expansion 

By retaining profits within the company there will be more income to put towards future property purchases, as well as ongoing general maintenance costs.  

Benefit from tax relief 

Yes, believe it or not, there is tax relief available to incorporated landlords that people who own their properties don’t get. Incorporated landlords can offset all their mortgage interest against the rental income they receive, which reduces the amount of taxable profits and in turn the amount of corporation tax payable. 

Cons of incorporation for landlords 

From a financial perspective, incorporating as a landlord seems like an overwhelmingly positive decision. Although as any great accountant will know, choices that heavily affect a business should not be taken lightly. Therefore, it’s important to note that there are a few negatives that come with incorporation. 

Greater responsibilities  

Incorporating will mean the landlord will more likely than not become a company director. This means they will have additional responsibilities such as filing statutory accounts, submitting a corporation tax return and other statutory obligations.  

Capital gains tax  

Setting up a limited company and transferring property from personal ownership to company ownership can be costly. The property owner will need to consider any gain made on the transfer as capital gains tax (CGT) and stamp duty (SDLT) could apply.  A good solicitor will prove invaluable at this point. 

It is also important to note at this time that companies do not get the benefit of the Annual Exemption Amount (AEA) whereas individuals do. The AEA means that the first £3000 of any gain is tax free. 

If you feel intimidated by the switch from sole trader to limited company as a landlord, you can seek the services of an accountant for self-employed individuals. At Jan McDermott Chartered Accountants, we help a range of business types, including start ups, sole traders, limited companies, as well as providing dedicated landlord accounting services. 

How to go about incorporation 

The process of setting up a limited company and transferring a property portfolio can seem complex but we can help with this. It is important to note that you should use the following SIC (standard industrial classification) codes: 

  • 68209 – buying properties for the purpose of renting to other parties  
  • 68100 – buying property for the purpose of resale. Note that this is different to buying property for resale when you should use this SIC code  

 This is important so the mortgage lender can see the company is being used for buy to let purposes. As with all limited companies, you will need a separate bank account in the company name. 

 When it comes to transferring property to the company, it must be sold at market value with an independent valuation required for confirmation. The transferral process then has the potential to include a large team, namely mortgage company representatives and conveyancers.  

Chartered accountants for landlords 

At Jan McDermott Chartered Accountants, we take the time to get a complete understanding of your situation when you come on board. Incorporating won’t always be the right choice, so this allows us to offer expert accounting advice that relates to your specific situation as a landlord. Whether you are just starting out and need support with record-keeping, or you are looking to incorporate your property portfolio, our team can help. We can be contacted by phone, email, or via our website.

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