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Setting up a property company – a guide for landlords

5-minute read

Setting up a property company – a guide for landlords
Conor Shilling

Conor Shilling

16 August 2021

In recent years, more landlords have bought properties through a limited company so they can get more buy-to-let tax relief.

Read on to find out why tax changes encouraged more landlords to set up a property company, as well as the pros and cons of taking this approach.

What is a property company for buy-to-let?

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.

If you set up a company for your buy-to-let portfolio this is known as incorporation.

Landlords who own their properties through limited companies also receive their rental income differently as it belongs to the company. This means you can either pay yourself a salary from the company or take your rental income as dividends.

There is extra admin involved in setting up a company, such as registering with Companies House, registering with PAYE (if you want to pay yourself a salary), and keeping your accounts up to date.

What are the pros and cons of setting up a property company?

There are tax benefits to owning a limited company to rent out your properties, although it can be more complicated and time-consuming.

It’s important to weigh up the pros and cons and work out which ownership structure is best for you. Here’s an overview of what you need to know:

Benefits of incorporation

  • owning through a limited company allows you to pay corporation tax, which is usually lower than individual income tax rates
  • transferring a property between companies could mean you don’t need to pay stamp duty, inheritance tax, or capital gains tax, which could save you money
  • restrictions on buy-to-let mortgage interest tax relief don’t apply to limited companies
  • you may benefit from greater legal protection due to ‘limited liability’, which means if something goes wrong you’re only liable for the money you put in when the company was incorporated

Downsides of incorporation

  • there are more responsibilities for landlords with limited companies, such as filing accounts and returns
  • it can be harder to get a buy-to-let mortgage for a limited company, although the number of products has increased in recent years
  • there are costs for switching to a limited company, and if you take profits out of the company you’ll have to pay income tax
  • you’re likely to need specialist advice from a broker or accountant, which could cost you more and make the process longer

How to set up a property company

To set up a limited company, you’ll need to register with Companies House. The cost for starting your company starts at £12.

You’ll need to create a company name and give an address for your company. Next, you’ll need to appoint directors and shareholders, and give a definition of business activity (relating to letting property).

Our step-by-step guide to registering with Companies House gives you an overview of everything you need to do.

Once your company has been created, you’ll need to set up a business bank account and register to pay corporation tax.

You’ll need to keep records such as a confirmation statement and annual returns, although many landlords outsource this work to an accountant.

Setting up a property company can be quick and easy, but if you’re going to run the company yourself you’ll need to make sure you’re aware of all your responsibilities and costs.

Corporate tax rates versus individual tax rates

Landlords who own their properties personally will pay 20 per cent tax on buy-to-let income between £12,571 and £50,270, with a higher rate of 40 per cent for income between £50,271 to £150,000. There’s an additional rate of 45 per cent of income over £150,000.

After changes in April 2021, the personal allowance (up to £12,570) and higher rate threshold are expected to stay the same until 2026.

Meanwhile, the main corporation tax rate is 19 per cent and has been since 2017. However, the top rate of corporation tax (on profits over £250,000) will increase to 25 per cent in April 2023.

Our guides to corporation tax and Self Assessment rental income tax return for landlords cover everything you need to know depending on which type of ownership you have.

Buy-to-let tax changes – what do you need to know?

The reason why many landlords have chosen to incorporate their portfolios is due to tax changes which started in April 2017.

Before April 2017, you could deduct 100 per cent of mortgage interest from rental income, leaving many landlords with a favourable income tax bill.

However, the government gradually phased out buy-to-let mortgage tax relief, replacing it with a 20 per cent tax credit in April 2020.

This means landlords paying income tax can no longer deduct costs from their tax bill and only receive 20 per cent of their mortgage interest cost back.

How the tax changes affected lower rate taxpayers

This table shows the difference in tax bills for a lower rate taxpayer (20 per cent) between 2017 and 2020:

Annual incomeMortgage costsOther expensesAllowable reliefTax bill
2017£35,000£10,000£5,000£15,000£800
2020£35,000£10,000£5,000£5,000£1,800

How the tax changes affected higher rate taxpayers

This table shows the difference in tax bills for a higher rate (40 per cent) tax payer between 2017 and 2020:

Annual incomeMortgage costsOther expensesAllowable reliefTax bill
2017£95,000£20,000£8,000£28,000£15,999.40
2020£95,000£20,000£8,000£8,000£19,599.40

The tax bills for 2021 would be slightly different due to the changes made to the personal allowance and higher rate tax bands mentioned above.

Buy-to-let tax relief for landlords

If you run your portfolio through a limited company, the main tax relief is that you can claim mortgage interest as a business expense.

Whether this saves you a significant amount of money depends on your circumstances. However, if you’re a higher or additional rate taxpayer, limited company ownership is likely to lower your tax bill.

Limited company landlords can also benefit from inheritance tax relief if you’re planning on handing your property down to family in the future.

Capital gains tax on buy-to-let property

Landlords who sell a property they own personally will have to pay capital gains tax (CGT) above the current allowance of £12,300.

However, if you own your property through a limited company, you won’t have to pay CGT but you will need to pay corporation tax as it’ll be considered ‘taking profit’ out of your business.

Whether it’s cheaper to pay CGT (and benefit from the tax-free allowance) or corporation tax depends on how much profit you expect to make from selling your property.

Our guide to capital gains tax gives further information on how much you’d have to pay if you sold one of your properties as an individual.

Should you set up a limited company to buy property?

It can be costly to incorporate and sell your buy-to-let property to a limited company. There’s also the extra administration work to consider, and the cost of hiring an accountant.

However, due to landlord tax changes, there could be long-term benefits to setting up a limited company to buy property – particularly if you pay higher rate tax and own several properties.

Incorporating can give you more flexibility when it comes to your landlord tax return and selling property, as well as making your portfolio more professional.

Whether you decide to start a rental property business will depend on your financial circumstances and future plans.

Before you make any decision, make sure you speak to a financial expert and do your research.

Do you own your properties through a limited company? Let us know in the comments below

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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