Why form a limited company?

From April 2017, tax relief on mortgage costs for buy to let landlords has begun to be gradually phased out. Under the previous rules, landlords had been allowed to deduct mortgage interest and other expenses from their rental income before calculating tax liability, consequently allowing mortgages to be paid off before rental income was declared. With the new changes, however, interest relief has been lowered to 75% for this tax year and will continue to be cut by a further 25% each year until 2020, when landlords will start to pay tax on their entire rental income. In its place they will receive a tax credit equal to 20% of their interest costs, pushing up bills for higher rate and additional rate taxpayers and decimating previously secure profits.

Furthermore, as declared rental incomes rise accordingly, an estimated 440,000 landlords will be pushed into a higher rate tax bracket, thereby incurring additional costs. However, these provisions are only applicable to individual taxpayers and are exempt to landlords operating through a company. This is because limited company finances are legally separate from individual accounts, which means that any rental profits are subject to corporation tax at a (current) flat rate of 19% (lower than income tax) and 17% from 2020.

Is it appropriate for all landlords?

In a word, no. The costs involved with incorporating can be excessive for landlords with a limited portfolio, while increased workloads, responsibilities and expenditure can be onerous for those who proceed.

Transferring, or ‘selling’, existing properties into a limited company can dramatically increase your tax liability in the short term. There is no capital gains allowance on houses that have increased in value since purchase, so it is likely that this will have to be paid unless you can show that the property is run as a ‘business’ (See below). In addition, any ‘purchase’ will be subject to the 3% stamp duty hike on second properties introduced in 2016, irrespective of your company status. Properties must be sold at the current market value, so duty fees alone on multiple purchases could outweigh the benefits of incorporating.

Capital gains allowance is worked out according to whether a property is classified as part of a ‘business’ or as an ‘investment’. In order to show that a property is run as a ‘business’, landlords will need to take greater responsibility for day to day maintenance and tenant management work. If they are currently employing a letting agent to shoulder the burden or working at another job, then the property will probably be classed as an ‘investment’ and the allowance will be lost. Given the costs involved with capital gains, this could (again) make the difference between maintaining profitability or running a deficit.

As a company director you will be obliged to complete and return an annual returns and filing accounts statement to HMRC. This can equate to a great deal of paperwork, so it may be necessary to employ the services of an accountant, thereby eating further into profits.

You will have to pay income tax and class 1 National Insurance Contributions on all declared income. Profits (which belong to the company) are disbursed as taxable dividends, so you may be liable to dividend tax if you withdraw money from the company.

Some lenders are unwilling to transfer existing individual buy to let mortgages to a company account. If they refuse to do so, you may be forced to remortgage the property, potentially incurring exit fees, arrangement fees and legal costs.

However, costs for limited companies are usually higher than for an individual. Broker and solicitor fees are charged at a higher rate, for example, due to increased workloads and legal complications, while mortgage lenders’ arrangement fees are also higher (around 1-1.5%).

Many lenders do not offer limited company mortgages.

Setting up a limited company

If, having factored in all costs, you decide to proceed with a limited company, you will need to take the following steps:

• First off, you will register (or incorporate) your business with Companies House, the registrar for UK businesses. This can be done, by yourself, online (for a nominal fee of around £15-75 plus VAT), or by a solicitor or accountant.
• You will need to register the company for corporation tax. If you fail to register with Companies House within three months of incorporating, you will have to pay a penalty charge.
• You’ll need to set up a special purpose vehicle in order to ‘buy’ existing or new stock. This is a company which is registered for the sole purpose of buying or letting property. Most lenders will only choose to deal with SPV’s, or ‘none trading companies’, because they are less risky than trading companies and easier to underwrite.
• You should set up a separate company bank account.

  Once this is all done, you will start the process of transferring, or ‘selling’, existing property stock to your company.