Updated 16 May 2022
Those who buy to let are facing a triple whammy of additional financial pressures. We take a look at one of the possible solutions: incorporating your business. However, such a step isn’t without its drawbacks – so is it for you? Article by Nick Green
The 3 per cent extra charge in stamp duty for additional properties (including buy-to-let) hasn't been the worst thing to hit landlords in recent years. Tax relief on mortgage interest payments is now a flat rate of 20 per cent, which since 2017 has been eating into the profits of higher earners who had previously qualified for relief at 40 per cent. You can find out more about that here. And most recently, of course, the COVID-19 lockdown has thrown the entire property market into disarray.
Even when the UK returns to normal, things may never be as 'easy' as they once were. However, there is a way to reduce the impact of these changes – but it’s a big step and certainly won’t be for everybody. If you incorporate your buy-to-let business as a limited company, you won’t pay income tax on the profits, you’ll pay corporation tax instead – which is lower (currently 20 per cent). This should significantly offset the halving of tax relief for higher band taxpayers.
Lately there has been a huge spike in applications for landlords setting themselves up as limited companies to take advantage of this tax break, and the number of buy-to-let mortgages issued to companies has likewise soared. But despite the potential savings, it’s not something to rush into. There are many pros and cons to weigh up first.
A limited company is legally separate from you as an individual, as are its finances. Private limited companies are those with privately held shares, owned by just a few people (or you could be the only shareholder). Public limited companies have shares that can be traded on the stock market.
To set up your company you need to register at Companies House (you can do this online). This part is quite easy, as the fee is low and it requires just requires basic information and the signatures of the director(s) and witness.
However, you will need to consult both a solicitor and an accountant on whether or not you should incorporate. You will be required to supply annual accounts to Companies House, and inform them of any changes to your company (such as new employees) within 14 days.
You’ll need to be ready for a lot more paperwork, including your corporation tax return, a PAYE salary scheme and workplace pension (if you hire any staff), as well as your own self-assessment tax return and the company’s accounts. The accounts must meet the standards of the Companies Act, so you will almost certainly need to engage an accountant to handle this. You will need to factor in any additional fees before deciding if incorporating will really save you money.
Companies have to disclose all information about their business, including profits, salaries and margins. Your competitors may end up using this information to put you under pressure.
Fewer mortgage providers will lend to a company, so your choice of mortgage deals won’t be as broad and competitive as before. An independent mortgage adviser can be a great help, though.
Moving a property held in your own name into the ownership of your company requires a sale and purchase process, which will trigger a capital gains tax and stamp duty bill. Make sure this won’t cancel out any savings you stand to achieve.
At some point you will need to come up with a strategy for extracting the value of your business, and this can be a complex process.
In addition to the potential savings on income tax, there are other reasons to consider moving your buy-to-let business to a limited company structure.
If your business fails, you are only liable for the money invested in the company, so you are more protected than you would be as a sole trader.
The government is consulting on exempting companies with more than 15 properties from the 3 per cent stamp duty surcharge. If this comes about, you may be able to take advantage by forming a joint company with other landlords to pass the 15 property mark.
The best way to find out if it’s worth switching your buy-to-let business into a limited company structure is to talk to professional advisers – an accountant and a financial adviser can both help on this one, alongside a mortgage broker to find you the best value deals (so that’s a full house).