Landlords face many choices and responsibilities when it comes to caring for their business. From practical decisions around ensuring a property is physically fit for tenancy, to more admin-heavy duties around how they position their business.
One significant decision that landlords may face, especially portfolio landlords, revolves around whether they should set up a limited company to hold their existing and any new properties, or stay put as a sole trader.
For many landlords, the debate of becoming a limited company is a valid one. Here, we look at the pros and cons of landlords managing their buy to let properties within a limited company, to help you decide where your preferences fall.
This benefit isn’t specifically related to landlords, but it is one of the most prominent advantages of becoming a limited company. Registering as a limited company separates your business and personal affairs, so this means that landlords as individuals do not face responsibility for any losses made in the business.
Compared to individuals, companies are unable to benefit from a capital gains tax allowance. Despite recent changes following the 2024 spring budget which have reduced the total capital gains tax allowance from £6,000 in 2023/24, to just £3,000, this exemption is more tax efficient compared to the alternative of paying corporation tax.
Speaking of tax, if you’re a landlord paying a high rate of tax, registering as a limited company can be a more tax efficient method when it comes to paying tax on profits; specifically, by having access to corporation tax. As of 2024, corporation tax is currently set at 25%, which is 15% lower than the high-rate income tax band.
Compared to private affairs, there are some additional higher costs involved for limited companies, including personal guarantees, independent legal advice, debentures (in some scenarios) and annual accounting.
Lenders will often restrict certain types of loans to only be accessible to registered businesses. This could include things such as larger deposits, longer terms, and sometimes more advantageous rates.
While the process of registering as a limited company is relatively painless, it isn’t without its ongoing maintenance. Limited companies are required to not only submit their accounts to Companies House on a regular basis, but this information is kept open to the public and viewable by competitors, prospective tenants, etc.
Such upkeep may prompt businesses to enlist the help of an accountant, which carries even more overheads to be funded.
In a bid to level the playing field between landlords and homeowners in the housing market, Section 24 was introduced to the Finance Act 2015. Section 24 prompted landlords to add their rental income to their overall income, and removed the ability to deduct mortgage interest from a tax bill. In place of the previous benefits, Section 24 introduced a 20% tax credit. Despite this, Section 24 does still mean higher overall tax payments for landlords.
However, when a mortgage is provided to a limited company, they pay corporation tax and not income tax, therefore this can help landlords navigate these changes, as they don't apply to companies. For further information on whether this is the right option for you, you should speak to a financial advisor.
For more useful insights that could help with your day-to-day as a landlord, visit our business insights and landlord insights pages. You can also take a look at our range of buy to let mortgage options here.