Sajjad Nawas (pictured) is the owner of Buy to Let Tax Accountants

It’s become far more common in recent years for landlords to transfer their property portfolio into a limited company.

Only one in 10 (9.7%) landlords actively choose to operate as individuals, according to SevenCapital research.

There’s a reason for this, as government policy means limited company landlords can make a saving on their annual tax bill compared to operating as an individual. We’ll go into more detail on that later.

With this in mind, is it a no brainer to operate as a limited company? It depends, especially if you’re a landlord currently operating as an individual.

Before making the decision, you should weigh up the pros and cons. If you’re thinking of incorporating, be prepared for a difficult and costly process at first – though it’s likely to be worth it in the end.

Avoid the tax changes

First, we’ll address the obvious.

More landlords are choosing to operate through a limited company due to changes to mortgage income tax relief affecting individual landlords.

Before April 2017 buy-to-let landlords could deduct their mortgage interest costs and expenses from rental income when declaring profits to HMRC.

However this was gradually reduced from 100% of tax relief in 2017 to 0% from 2020.

Individual landlords now only receive a reduction on their final tax bill of up to 20% of mortgage interest costs.

The change can push landlords up the tax band into a higher bracket, so it can result in taxes escalating for the likes of those who were previously classed as basic rate taxpayers.

Operating through a limited company or Special Purpose Vehicle (SPV) – a type of limited company set up to only manage property – avoids these changes.

Doing the maths

I’m aware that some people’s eyes glaze over when you start talking about figures, but here’s an example to show how much you can save on your tax bill by operating as a limited company, rather than an individual.

If you receive a yearly property income of £18,000 with a mortgage costing you £8,000 in interest, you’ll pay £5,600 in tax as an individual landlord, after taking into account income tax and 20% mortgage interest basic relief.

If you’re operating through a limited company it would cost £3,882.50 by my maths, by calculating 19% corporation tax and a 32.5% Dividends Tax bill.

You can also withdraw a £2,000 dividend from your company tax-free.

This means, in our example case study, you’d make a saving of £1,717.50 by operating as a limited company compared to an individual.

If you own multiple properties this saving certainly adds up.

Limited company costs

While we’ve talked up the main reasons for operating via a limited company, doing so can incur some hefty upfront costs.

You need to pay capital gains tax, legal fees and potentially valuation charges.

There are also higher mortgage costs, as well as stamp duty, which we’ll expand on.

From individual to limited company – stamp duty

If you’re a landlord operating as an individual and you’re thinking of switching to a limited company, the main downside is you’d have to pay stamp duty on your properties again.

This is because going from an individual to limited company structure counts as a sale of ownership through a property sale and repurchase transaction.

It’s this factor that means many of the UK’s existing landlords have kept operating as individuals despite paying more in tax every year.

When you factor in the 3% stamp duty surcharge on landlords, stamp duty is expensive enough to pay once, let alone twice.

Of course, you can currently benefit from the stamp duty holiday until April 2021 – and we’ve seen some landlords incorporate lately for this reason.

However if you want to beat that deadline now it’s certainly tricky, with all the competition and impact of covid-19 at the moment.

As an aside it should be noted that stamp duty is less expensive for commercial property. So if you’re thinking of transferring that into a limited company it’s less painful.

Higher mortgage costs

While the market is slowly adapting to the more landlords operating through a limited company, there’s still some way to go.

Roughly a quarter of the UK’s mortgages are available to landlords via a limited company, with the rest going to individuals.

Many of these mortgages are offered by institutions commonly referred to as ‘specialist lenders’. Typically these are smaller institutions that charge a higher interest rate than a major high street lender.

Some major lenders do offer limited company buy-to-let. However they charge a higher interest rate for limited company products than their mortgages for individuals.

The result is that it’s usually more expensive to get a mortgage as a limited company landlord.

Silver lining

In terms of mortgages there’s one positive to using a limited company.

As a limited company you are able to borrow against an income coverage ratio of 125%, rather than 145% for a higher rate taxpayer as an individual.

This means you can effectively borrow more based on receiving the same amount of income from your tenants.

Complexities

Operating as a limited company is somewhat complicated.

You need to keep up with administration, such as annual accounts and return filings, though you’ll be rewarded by being able to claim things like mortgage broker fees when submitting your tax.

Of course, going with an accountancy firm like us can help you handle the complexities that arise.

Conclusions

Operating via a limited company does result in significant tax savings, despite some frustrations involved with upfront costs and higher mortgage rates.

If you’re looking to hold onto a portfolio of property for a long time, we’d recommend using a limited company structure for savings in the long run.

However, if being a landlord is something you plan to do for a short time, while you’re already registered as an individual, it might be worth keepings things as they are.

Paying stamp duty twice is not something anybody wants to do, though even this cost could be overshadowed by tax savings over time.

This is why it’s far more of a no brainer to operate via a limited company as a new landlord, rather than somebody that’s been in the game for a long time.

Therefore, it depends on your profile as a landlord, whether you should operate as an individual or via a limited company.

IDX Real Estate