Setting up a limited company for rental property

All good landlords will try to maximise their profit as much as possible, so, understandably, more and more landlords are considering setting up a limited company for rental property. With changes in tax regulations and a growing interest in property investment through a limited company, many landlords are exploring whether buying a house through a limited company will work for them.

Property investment through a limited company can bring many benefits, but there are also some disadvantages. This article will guide landlords through the pros and cons of setting up a Ltd company to buy property and discuss the process of transferring rental property into that limited company.

We’ll also highlight several aspects that should help landlords assess whether incorporation is right for their portfolio based on their income level, long-term goals, and inheritance planning.

What is a limited company?

A limited company has its own identity and is legally separate from its owners and managing directors. In the world of rental property, this means the ‘company’ is the legal owner of the property, with the landlord owning their shares in the company.

Property investment through a limited company increased in popularity in 2017 due to the tax relief changes made by the government in the United Kingdom. The government phased out tax relief on mortgage payments for private landlords. Instead, private landlords received a 20% tax credit.

As a result of this introduction, private landlords noticed a significant increase in the amount of tax they had to pay each year. Landlords affected, particularly the higher earners, looked at setting up a limited company for rental property.

What are the advantages of a landlord setting up a limited company for rental property?

There are several advantages for landlords with a Ltd company for buying property. These range from tax benefits to limited liability protection, inheritance planning and mortgage benefits.

Tax advantages 

Carrying out property investment through a limited company is beneficial as it comes with tax advantages, especially for higher-rate taxpayers. If a landlord hasn’t set up a limited company for rental property, their profits from the properties will be added to their other earnings. This could push you into the top tax bracket. You could end up paying 45%.

If you have set up a limited company for rental property, the company pays corporation tax, which is 19% for profits of under £50,000 or 25% if you make a £250,000 profit or more. If the company makes a profit between those two numbers, you will be entitled to marginal relief. 

Marginal Relief provides a gradual increase in the Corporation Tax rate between the small profits rate and the main rate.

The company will have to pay the owner (likely the landlord) a salary, which can be subject to income tax. However, the company can pay the owner in dividends, which are taxed at a lower rate.

Tax relief on mortgage interest

Having a Ltd company for buying property allows landlords to claim tax relief on mortgage interest. Without setting up a limited company for rental property, tax relief on mortgage interest wouldn’t be possible. The government introduced this change in 2017.

Limited Liability Protection

Buying a house through a limited company will give you better financial security. As a shareholder, you are not personally responsible for the company’s debts if the rental business faces financial difficulties, safeguarding personal assets like your home or car. Conversely, as a sole trader, your personal assets could be vulnerable to business-related financial obligations.

What are the disadvantages of a landlord setting up a limited company for rental property?

Setting up a limited company for rental property certainly has its benefits, but there are some drawbacks which landlords need to be aware of. Considering the drawbacks helps you make an informed decision about whether a Ltd company for buying property is right for you.

Additional responsibilities and costs

The landlord, who is likely to be the company’s director, will need to complete extra paperwork to ensure that they comply with the regulations. Firstly, setting up a limited company for rental property can be complicated and might require a legal expert to guide you through the process correctly.

Directors must keep financial records and submit them to Companies’ Houses and HMRC when required. You also need to keep other shareholders informed if applicable. Hiring a secretary to take over those tasks for you is possible, but this also comes at a cost.

No capital gains tax allowance when selling property

Sole traders get a tax-free capital gains allowance when selling property, whereas limited companies don’t qualify for this benefit. Instead, they face corporation tax on the entire gain, which could mean a higher tax cost when selling a property.

Transferring property investment through to a limited company

If you already own a property and subsequently set up a limited company, you will need to sell the property to the company. As a result, the limited company will have to pay capital gains tax and stamp duty. There may also be implications for your mortgage.

Mortgage availability

Buying a house through a limited company might bring additional challenges. For example, there are typically fewer mortgage options available. Limited companies typically have stricter lending requirements and higher interest rates.

Is setting up a limited company for rental property right for you?

Landlords need to assess whether incorporation is right for their portfolio based on income level, long-term goals, and inheritance planning. 

As explained above, landlords who are pushed into the top income tax bracket of 45% will benefit more from setting up a limited company for rental property than landlords who are not pushed into that income tax bracket.

The disadvantages outweigh the tax savings if you are not a higher-rate taxpayer. If you’re unsure whether it will be financially beneficial, then it is recommended to speak to a financial advisor or tax specialist. They can crunch the numbers for you. This will allow you to make an informed decision on whether to set up a Ltd company to buy property.

You will also need to consider how long you will invest in property. Some disadvantages include additional costs when transferring property to a limited company, such as stamp duty payments. If you’re only going to be involved in property investment for the short term, you will probably not save that money back, or at least not significantly, for it to outweigh the setback.

Whether you remain a sole trader or decide to set up a limited company for rental property, landlord insurance is the best way to protect your investment as much as possible. We have the expertise to find the best landlord insurance deals that are suitable for your needs as a landlord. 

Contact us today at 01788 818 670 for a quote, and don’t forget to visit our resource centre for more information on how to be a successful landlord.