Until recently renting out residential property as a sole trader was relatively profitable.

However, tax changes, such as the end of the wear and tear allowance and the restriction of mortgage interest relief, mean that making a healthy profit is getting harder. So it’s not surprising to learn that incorporation is on the rise. 

In fact, limited companies made more than 70% of buy-to-let mortgage applications in the first 9 months of 2017, according to specialist lenders. In comparison, the figure was 45% in 2016.

This is a trend we recognise as more of our clients are asking us about changing to a limited company in a bid to stay profitable. So should you consider buying through a limited company?

As with most tax questions there’s no straightforward answer (unfortunately). Much will depend on your circumstances such as:

  • how many properties you own
  • whether you plan to buy more
  • how long you plan on keeping your properties
  • your attitude towards admin and recordkeeping.

And we can’t guarantee that tax rules and regulations won’t change in the future. 

With that in mind, we take a look at some things to think about before you sign on the dotted line.

Mortgages

Generally it is more expensive to borrow as a company than as an individual and there aren’t as many options on the market. Although the interest margins are narrowing as more lenders have come to the market.

If you own or buy a property outright, this won’t be a consideration. 

Mortgage interest relief

One of the big changes for landlords operating as a sole trader is the restriction of mortgage interest relief.

Until April 2016, mortgage interest was an allowable expense which could be deducted from profits before tax.

This is gradually being phased out and will eventually be replaced with a tax credit with relief given at 20%.

Higher and additional rate taxpayers will pay more tax as a result of this change, but basic rate individuals won’t be affected.

Properties owned by companies are not affected by these changes and can continue to claim mortgage interest as an expense.

Admin

There are more rules and reporting requirements for limited companies, including filing records at Companies House and annual tax returns.

This means that running a limited company can be burdensome in terms of your time and the time of your accountant.

Tax on profits

If you own a property as an individual, your profits will be added to your other income and taxed accordingly.

On the other hand, profits on properties owned by limited companies are liable for corporation tax.

Given that corporation tax is currently 19% and the top rate of income tax is 45%, at first glance there are tax savings from operating as a limited company.

However, taking profits out of a limited company (such as a salary or dividend) is also likely to trigger a tax charge.

It is also important to consider what you want to do with your property income.

If you don’t need it immediately you could consider leaving it in a company. However, if you require a regular income, your tax planning will be more complicated.

There are many options out there, so it is important to get expert advice before making a decision.

Tax when changing structure

HMRC treats the transfer of ownership from an individual to a company as a sale, which means a potential capital gains tax charge.

Although individuals have a £11,300 allowance for 2017/18, gains on buy-to-let property above this are taxed at 18% (basic rate taxpayers) or 28% (higher rate taxpayers) and there is little scope for mitigation.

Get advice

Changing your business structure requires careful consideration and planning. We have guided many landlords through this process; speak to us to see how we can help.