Almost half of landlords will form a company to buy a new rental property – here's why

There’s been a dramatic shift in the number of landlords buying their properties through a company.

A total of 64 per cent of landlords with four or more properties who plan to buy this year will take this option compared with only 21 per cent who intend to buy as individuals.

Why landlords are setting up a limited company to buy to let

A landlord can decide to buy as an individual and be subject to tax charged at income rates, or buy through a company and benefit from potentially preferential rates of tax.

Even those with smaller portfolios are choosing this option – across the market as a whole, 44 per cent of landlords will set up new buy-to-let purchases through a corporate structure.

Corporate tax rates versus individual tax rates

Buying properties through a company allows you to avoid the harsh reductions in landlord tax relief that have recently been introduced.

Instead, a corporate setup lets you continue off-setting your buy-to-let mortgage interest against your profits, which are subject to Corporation Tax of 19 per cent rather than the higher individual income tax rates.

Individual income tax rates in England and Wales

Band 2018/19 2019/20 Tax rate
Personal Allowance Up to £11,850 Up to £12,500 0%
Basic rate £11,851 to £46,350 £12,501 and £50,000 20%
Higher rate £46,351 to £150,000 £50,001 and £150,000 40%
Additional rate over £150,000 over £150,000 45%

Note: the tax-free Personal Allowance isn’t available if your income is over £125,000.

Individual income tax rates in Scotland

Band 2018/19 2019/20 Tax rate
Personal Allowance Up to £11,850 Up to £12,500 0%
Starter rate £11,851 to £13,850 £12,501-£14,549 19%
Basic rate £13,851 to £24,000 £14,549-£24,944 20%
Intermediate rate £24,001 to £43,430 £24,944-£43,430 21%
Higher rate £43,431 to £150,000 £43,430-£150,000 41%
Top rate over £150,000 over £150,000 46%

Note: the tax-free Personal Allowance is reduced by £1 for every £2 earned over £100,000 – the same as the rest of the UK.

More difficult to get a buy-to-let mortgage

And it’s not just the tax changes that are taking their toll on landlords.

Research by Precise Mortgages found that 73 per cent of landlords believe lending criteria and portfolio application process changes introduced by the regulatory bodies are making it more difficult to secure mortgages – and 75 per cent say the changes will slow down applications.

Benefits of using a limited company to get a buy-to-let mortgage

The interest coverage ratio on limited company applications is also lower than for most individual landlord applications.

Alan Cleary, Managing Director of Precise Mortgages, said: “The buy-to-let market is changing and the switch to greater use of limited company status is one aspect of the development underlining the increasing maturity of the sector.

“There are good reasons why limited company buy-to-let is dominating the purchase market and we expect that will continue to be the case this year and next.”

He added that specialist support is required when buying as a limited company or considering switching to a limited company status as there are costs involved.

Landlords who decide to set up a limited company must be aware that there are added complications. Mortgages can be harder to secure and more expensive, and you must follow the rules on running a company and filing accounts and returns.

Read our Self Assessment tax returns guide for landlords for more information.

Tell us more in the comments below. What were your reasons for deciding to – or deciding not to – set up a company to buy a rental property.

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