Posted Mar 18th, 2024

In recent years, there has been a surge in the establishment of new Buy to Let companies, with a record number of 47,400 formed in 2021 alone. Landlords are increasingly opting for this business structure in an effort to mitigate tax liabilities. However, before jumping on the bandwagon, it's essential to weigh the advantages, disadvantages, and potential ramifications. Let's delve into the key considerations to help you make an informed decision.

Benefits of Setting Up a Limited Company for Property

Following the changes to tax relief rules in 2020, there has been a notable migration of private landlords towards adopting a limited company structure. The primary reason behind this shift is the considerable tax efficiency offered by operating through a limited company compared to being a private landlord.

Tax Relief

Formerly, private landlords enjoyed the privilege of claiming their entire mortgage expenses as a business expense, substantially lowering their tax liabilities. However, between 2017 and 2021, successive changes were implemented, gradually eroding this tax advantage for landlords. Over this period, each year witnessed a quarter of landlords' financial costs becoming non-deductible, with full implementation by the 2020/21 financial year. Consequently, landlords found themselves eligible for only a tax credit based on 20% of their mortgage expenses, resulting in considerably higher tax burdens — up to 40% more in some cases. Additionally, certain landlords were pushed into higher tax brackets due to these revisions.

Conversely, letting properties through a limited company allows landlords to claim mortgage interest as a business expense. Hence, many landlords are now turning to the limited company structure as it offers a viable means to significantly mitigate their tax liabilities.

Tax Rates

Furthermore, higher rate taxpayers stand to gain substantial savings by adopting the limited company approach, owing to the divergent tax treatment for companies as opposed to individuals.

Tax Implications of Salary vs Dividends

It's crucial to understand that even with a limited company structure, taxation remains a requisite on the income derived from or withdrawn from the company. The tax liability varies based on whether one opts for a salary, dividends, or a blend of both.

- Paying Yourself a Salary: The salary you receive will be subject to income tax at the prevailing rates and is also liable for National Insurance contributions.

- Taking Dividends: Shareholders can opt to receive dividends, which are a portion of the company's profits. Dividends are taxed at a lower rate compared to salary income. The first £1,000 of dividends is tax-free, with rates of 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate. Dividends are not subject to National Insurance contributions.

Inheritance Tax

When planning to pass down your property or properties to family members, utilising a limited company offers more flexibility in mitigating inheritance tax. Unlike private landlords, who have limited options to avoid inheritance tax, structuring your properties within a company provides avenues to reduce or eliminate this tax burden. Alternatively, gifting properties while alive entails paying Capital Gains Tax on the appreciation since acquisition.

Downsides of Opting for a Limited Company Structure for Property

Purchasing property through a limited company or transferring existing property to one may offer tax advantages, particularly for sizable property portfolios. However, there are important drawbacks to consider, and the benefits may not always outweigh the drawbacks.

Mortgage Choice: Limited companies typically have fewer mortgage options compared to private landlords, with higher interest rates being a common occurrence.

Tax Implications of Salary vs Dividends: If you take a salary from your company, this will be subject to income tax and National Insurance. But you can claim any salary paid by your company as a business expense, reducing its corporation tax bill. Dividends are subject to lower tax rates and no NI, but they do not count as a business expense for your company.

Cost and Hassle of Transferring Property: Transferring property to a limited company involves costs such as Capital Gains Tax, Stamp Duty Land Tax, conveyancing and solicitor fees, and potential mortgage repayment fees. While these costs can be significant, the long-term tax savings may outweigh them.

Stamp Duty on Transfer of Property to a Limited Company: When transferring property to a limited company, you’ll need to pay Stamp Duty Land Tax (SDLT) based on the market value of the property.

More Responsibilities: Directors of limited companies have additional responsibilities and paperwork compared to private landlords.

Conclusion

Setting up a limited company for property investment has its pros and cons, and the decision depends on various factors such as the size of your property portfolio, future plans, and tax implications. It's advisable to seek our professional advice to determine the most suitable option for your circumstances.

How to Set Up a Limited Company for Property

D4 Accountants can assist you to set up a limited company for property investment, with a correct structure of the company and using the SIC codes which are required by the lenders.

Additional Services Offered by D4 Accountants

In addition to providing expert guidance on tax-efficient structures such as limited companies for property investment, our accounting firm offers a comprehensive range of services tailored to meet your financial needs. From bookkeeping and payroll management to tax planning and compliance, our team of experienced professionals is dedicated to helping you achieve your business objectives. With a focus on efficiency, accuracy, and compliance, we strive to deliver tailored solutions that maximise your financial potential while minimising risk. Whether you're a seasoned property investor or just starting out, we're here to provide the support and expertise you need to succeed in today's complex business environment. Contact us today to learn more about how we can help you achieve your financial goals.