Landlords & Tax: Is it Worth Starting a Limited Company?

The tax situations of buy-to-let landlords are in constant flux these days, with various changes popping up just about every year in an effort to adjust to the housing crisis. So if you're thinking about setting up a limited company to handle your rental properties, here are some questions you will want to consider:

Who can set up a company?

Anyone! Really, any individual. Despite the complaints of those who see it as tax evasion, setting up a company to handle your business interests is perfectly legal and ethical.

How do I do it?

It is pretty easy to incorporate and create a limited company. You need to choose a name, register with Companies House and HMRC, and then have your company "buy" the property or properties that you are letting.

What are the tax benefits?

Under current regulations, property investors are eligible for mortgage interest tax relief of up to 45 per cent. However, under the government’s summer budget announcement, buy-to-let landlords will not be able to make the same deductions on mortgage interest as before, and will instead be eligible for a 20 per cent tax credit. This means that those who pay the top rate will be getting a whole lot less tax relief. This is not the case, however, for companies that receive mortgage interest, so if you form a company you will still be eligible for the old tax relief rules.

Do the benefits depend on your financial situation?

Yes. The higher your interest rate, the bigger the difference establishing a company will make in terms of tax relief. This directly proportional relationship also holds for those landlords with higher incomes (for those with several properties, for example).

What are the costs associated with incorporating?

You need to keep in mind that the company could be subject to additional taxes (capital gains, stamp duty) depending on your circumstances.

Since incorporating requires your new limited company to buy your buy-to-let property, you may need to pay capital gains tax on it if its value has increased since you first purchased it. You can, however, claim what is called "incorporation relief" if you can demonstrate that the property is a business instead of a private investment. This is easiest if you have multiple buy-to-let properties.

In addition to new taxes, there are a few extra administrative costs involved in becoming a limited company including fees charged by Companies House and HRMC, which can run up to £1,000 per year.

Is it always a good idea to incorporate?

No. There are certain investor situations in which it does not make sense to do so. As outlined above, the biggest benefits will go to those who have the highest tax burdens. If you are paying a basic rate, or are otherwise among those who are not affected by recent changes to the regulations regarding tax relief, you may not have any reason to incorporate.

While incorporating is in no way a cure-all option for every buy-to-let investor, it certainly has some concrete benefits in particular cases.