Register a limited company as a landlord

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.

With eroding tax breaks and tighter margins on buy to let property, landlords wonder whether to register a limited company to hold their rental property or hold them personally. To make this decision you need to understand the benefits and drawbacks if you register a limited company as a landlord.

In this blog, we’ll look at setting up a limited company as a landlord, the tax implications and tax benefits on areas such as income tax, corporation tax, stamp duty land tax, capital gains tax and other benefits and drawbacks of utilising a limited company as a landlord.

Should I set up a limited company for my buy-to-let?

Over the years, the government has hit landlords with many changes and legislation, meaning it has become harder to make good profits on buy to let properties. However, all is not lost! Holding your properties in a limited company may still be beneficial. Whether it is beneficial to you, may depend on things like other income, your future plans and your family circumstances and how many properties you own. For example, if you only hold one or two properties, then owning them as personal assets may be better.

With private landlords not being able to deduct mortgage expenses from their rental income to reduce their tax bill, many smaller landlords have changed the way they hold property and from paying tax as an individual to setting up a company and pay corporation tax instead.

We always recommend that you seek professional advice before setting up a limited company as a landlord or transferring property into a limited company.

Request a call from one of our landlord and property experts at dns accountants today for more help and advice.

Can I set up a limited company to buy property?

The simple answer is yes, you can set up a limited company to purchase buy to let property and there can be advantages to buying properties through a company.

Structuring your property portfolio

If you are looking to build a wider property portfolio, then once you have figured out the reasons why, the financing etc, then how you structure your property portfolio is very important. The options open to structuring your property purchase or purchases are:

• Individual
• Partnership
• Limited Company or Special Purpose Vehicle (SPV)
• Trust

If you are only intending to buy one property, you can buy this as an individual in your own name. This will depend on your own finances, tax position etc.

If you are intending to build a property portfolio with several properties, then you can hold the properties in a limited company or have a limited company for each property. A Special Purpose Vehicle or SPV is simply a regular limited company which is used solely for a particular purpose. In the case of property investment, its used to purchase and rent out properties.

If you require finance, then buying in a single limited company can become complex. My advice is to buy each property via a SPV or separate limited company. This gives you more flexibility with each property deal you do.

Download our guide on buying property through a limited company.

Partnerships can be used but are less popular these days, most people purchase in their own name or via limited company.

Registering a limited company

Setting up a limited company is a fairly simple process, but you need to ensure you get it right. All limited companies need to register with Companies House in the UK. The registration process is called incorporation. An individual can register his / her limited company online or via post.

We recommend you use a qualified accountant or company formation agent such as dns accountants to ensure the company is registered and set up correctly.

Here are the steps you need to take to set up a limited company in the UK:

What type of limited company should I set up as a landlord?

Once you’ve decided to set up a limited company, you have to choose which type you wish to form. The two main choices are:

• Private Limited Companies (Ltd) - which is the most common.
• Public Limited Companies (PLC).

Pick your company name

Like a website address, your company name has to be completely unique. Here at dns accountants, we can assist with the registration and incorporation process on behalf of the business.

What do I need to register a company in the UK?

• The type of business activities your limited company will carry out by choosing a SIC code (Standard Industrial Classification code) for your business. You can select the most appropriate code from the SIC code list online at Gov.uk website.
• The company’s registered office details. You’ll need a Registered Office Address and to provide a service address. You can use your residential address for both, but you can protect your privacy by using a separate registered office address. Here at dns accountants, we offer a registered office address service.
• Decide on the ownership of your company – A limited company must have at least one shareholder. So, you need to decide how many shareholders and the share structure (i.e. how many shares they will each have and the types of shares. You should also be clear and decide on shareholders decision making powers to avoid future disputes.

What documents do I need to register a limited company?

To complete the incorporation process, you will need the following documents completed and returned to Companies House:

• Application to register a company (form IN01) and the fee.
• Memorandum of association.
• Articles of association (unless you adopt model articles in their entirety).
• Additional information if your application includes a sensitive word or expression.

How do I register a new company with Companies House?

Completing the registration process involves submitting all necessary documents, paying applicable fees, and providing accurate information about your company. This step formalizes your company’s legal existence as a registered entity and enables you to conduct business activities within the legal framework.

Advantages of buying property through a limited company

Property companies can be more tax efficient way to hold investment property. One of the main benefits of setting up a property investment company, rather than holding property personally is that a company pays corporation tax, rather than income tax on rental income from the property.

Corporation tax and income tax

Tax savings can be made via limited companies compared with owning buy to let property personally. This is because you will be pay corporation tax on any rental profits from the property in a limited company. If you own a buy to let property personally, you will have to pay income tax on rental income. Corporation tax rates can be lower than paying income tax (depending on your total income).

The corporation tax rate currently ranges from 19% - 25% (dependent on profits). Rates for personal tax are dependent on your personal tax band. Income tax rates are: 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer.

There may also be personal tax savings if you undertake tax-efficient profit extraction from the limited company vs personal ownership and the income tax you pay as a sole trader.

You could add family members (ss non-executive directors or shareholders) to your limited company, and this may give you additional tax benefits and savings on income tax via their tax-free allowance, lower tax thresholds and by drawing dividends from the limited company.

As a company director, you also have the flexibility to choose what to do with the profits. You can invest in further properties, save into a tax-efficient pension or pay out the profit strategically using dividends. This flexibility can help with your personal tax planning compared to personally owning properties and paying income tax on the income earnt.

Inheritance tax

Property held within a company gives more options when it comes to planning for inheritance tax.

If you plan to pass your business on to your family in the future, it’s much simpler to transfer a limited company than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty, inheritance tax and capital gains tax liabilities.

Allowable expenses & mortgage interest

Owning investment property via a limited company will allow you to deduct allowable expenses and utilise mortgage interest relief on your rental income to reduce the amount of profit and, thereby, the amount of corporation tax you pay.

Allowable business expenses reduce the amount of tax you need to pay HM Revenue and Customs (HMRC).

Landlords that rent out personally owned rental properties can no longer directly deduct any mortgage interest from their rental income to reduce their tax bill. Instead, this is done by giving the individual a 20% tax reducer meaning that higher rate and additional rate taxpayers miss out on further tax reductions.

However, the benefit of owning buy to let property as a limited company is that you can deduct mortgage interest from rental income so, this remains a large incentive to many people now to own or transfer investment property into a limited company.

Note: If there is an existing mortgage on a property, then some mortgage lenders may not allow you to move the property from personal ownership into a limited company. You may have to switch mortgages and you may find your finance costs are higher. Seek advice from your mortgage lenders first before moving property into a limited company.

Capital Gains Tax (CGT) & Incorporation Relief

Savings in Capital Gains Tax could be made when you transfer property into a limited company.

When making the transfer, you can receive shares in that company in exchange for the properties being transferred. Capital Gains Tax isn’t triggered at the point of transfer because the new shares in the company have a reduced base cost for tax purposes, equivalent to the original cost of the properties. However, you may still trigger CGT on the future disposal of those shares based on their value at time of disposal.

Incorporation relief is available to what HMRC deem to be a ’property business’ and not to those who just own property investments. HMRC generally accepts that a property business exists where a person works 20 hours a week or more on the properties. To justify the time spent on the property business, you need to have a sufficient number of properties in your portfolio.

To obtain incorporation relief, the whole property business must be incorporated as a going concern. This relief means you will not pay any tax until you sell (or ‘dispose of’) the shares.

To qualify for incorporation relief, you must:

• be a sole trader or in a business partnership
• transfer the business and all its assets (except cash) in return for shares in the company

The company acquires the properties at their current market value. When the company disposes of the properties, it would be taxed on the growth in the value of the property since the transfer (not the growth prior to the company).

Limited liability

As a sole trader owning properties personally you will be personally liable for any debt, losses or legal disputes. You will also be personally liable for business loans, and this may impact your own individual credit rating.

Setting up a limited company provides legal separation between individuals and the business, as the owner of a limited company, you are not responsible for company liabilities. With a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.

Cash flow advantages

When running a property business, you can choose if you retain your profits within the company and reinvest them to grow the business and make further property investments. This can help to protect personal cash flow and help you to better manage your property investment company cash flow.

Additional buying and selling flexibility

Owning property via a limited company means you could sell or transfer the property, or part of it, by selling or transferring the company rather than the properties within it. This may save time and may avoid the buyer having to pay Stamp Duty.

Spread risk

With a limited company structure, it is possible to spread and reduce investment risk. For example, if you invest in multiple properties, you could own each property in a separate company. This means that if one property investment fails, your other investments and assets will not be at risk

Disadvantages of buying property through limited companies

You will not own the properties

Properties owned in a limited company, will not be owned by you as an individual. Instead, you will own shares in the company. This can give rise to complications with mortgages, mortgage interest and mortgage lenders (see below).

More cost for basic rate taxpayers

If you’re a basic rate taxpayer with only one to two properties, the costs of running a limited company may outweigh the benefits. However, if your other earnings increase, or your profits on your rental property increase, you may find that you cross the threshold from basic rate taxpayer to a higher rate taxpayer. If your overall earnings are increasing, you might want to consider transferring property into a limited company.

Mortgage costs

Mortgage interest costs and mortgage interest payments are a huge consideration when deciding to set up a limited company for your investment properties.

Your mortgage costs may be higher when using a limited company as you are likely not to be able to take out a personal mortgage, you will need commercial mortgages to own property via a limited company. Finance costs of commercial mortgages and buy-to-let mortgages tend to be more expensive due to higher rates of interest and there are potentially less mortgage deals and less mortgage lenders to choose from to obtain a mortgage.

Other costs

You will need to consider that there will be additional fees involved when running a limited company, such as legal and accountancy fees for preparing annual accounts and completing personal and corporation tax returns etc. However, tax savings often outweigh these additional costs, so it is worth working with an accountant such as dns to calculate the costs and savings for your own personal circumstances.

Legal and compliance responsibilities

There are additional legal responsibilities and financial compliance required with property ownership via limited companies’ vs sole traders. As a director of a company, you are legally required to keep accurate company and financial records, submit company tax returns, file annual accounts and returns to Companies House and HMRC.

Can I live in a property if owned by my limited company?

Yes, you can but there may be tax consequences and also consequences if the property is purchased using a buy to let mortgage as many lenders forbid you from living in a property purchased with a buy to let mortgage. Seek advice.

Should I purchase buy to let property through a limited company?

This depends on if you plan to buy other properties and become a multi property investor. If you’re only planning to rent out one or two properties, then setting up and running a limited company may not be beneficial. If you plan to purchase property over a longer period and build a multi property portfolio, then is it better to do this using a company structure from day one and purchase the property via a limited company. Seek advice before you buy the property and discuss your plans with an accountant.

For more help and advice on buying a property through a limited company, download our guide.

Conclusion

Here at dns accountants we support landlords and property investors. For more help and advice, call us today on 03300 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

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