If you are thinking of getting into the property market one of your major decisions is whether to set yourself up as a limited company. What are the pros and cons?
If you are buying properties with a view to ‘flipping’ them, or keeping them as a buy-to-let investment, one of the major decisions you have to make is whether to set yourself up as a limited company. There are major pros and cons involved in this decision.
As a landlord, you can buy your properties as an individual and pay income tax, or you can buy them through a limited company and pay corporation tax. The main reason to buy through a limited company has traditionally been to benefit from buy-to-let tax relief.
Landlords who own their properties through a limited company receive their rental income differently, as it belongs to the company – you can choose to pay yourself a salary from the company’s revenue, or you can take your rental income as dividends.
Of course, there are duties and responsibilities involved in setting up a limited company, including registering with Companies House, registering for Pay As You Earn (PAYE) tax if you want to pay yourself a salary, and presenting company accounts.
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Corporation tax is usually lower than individual income tax rates, and transferring a property between companies could mean you don’t need to pay stamp duty, inheritance tax, or capital gains tax. Also, while it might be harder to get a buy-to-let mortgage as a limited company, restrictions on buy-to-let mortgage interest tax relief don’t apply to limited companies.
Operating as a limited liability company may also offer you better financial and legal protection should something go wrong.
The costs of setting up a company can be manageable – charges by Companies House for registering a name, address, directors and shareholders can start from as little as £12. But you will almost certainly need the advice of specialists and the services of an accountant, as well as setting up a business bank account and registering to pay corporation tax.
Before April 2017, you could deduct 100 per cent of mortgage interest from rental income, leaving many landlords with a favourable income tax bill, but a major change to tax laws meant that the government gradually phased out buy-to-let mortgage tax relief, replacing it with a 20 per cent tax credit in April 2020. Now, if you run your portfolio through a limited company, the main tax relief is that you can claim mortgage interest as a business expense – though whether this saves you a significant amount of money depends on your property portfolio.
This feature was first published in the Autumn/Winter issue of Property & Home With Martin Roberts. See more here.