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Should you put your buy to let portfolio into a limited company?

Estate Agent boards in front of houses, London. (Photo by BuildPix/Construction Photography/Avalon/Getty Images)
Estate Agent boards in front of houses, London. (Photo by BuildPix/Construction Photography/Avalon/Getty Images) (Construction Photography/Avalon via Getty Images)

Increased taxation and legislation mean many landlords are looking to move their properties into limited companies but is it the right move for you?

It’s no secret that it’s become a much tougher environment for landlords. The removal of tax privileges, more legislation and increased paperwork mean many are selling up while, those who remain, are looking at ways to make their portfolio more cost-effective. “We have seen more landlords looking to either incorporate their existing portfolio or to continue building their portfolio through a limited company,” says Anton Lane, managing partner, Edge Tax. As this looks to be a growing trend, we’ve spoken to several tax and property experts about the pros and cons of creating a limited company and what you need to look out for if it’s something you’re thinking about.

The Pros

One of the main advantages of having properties held in a limited company is less taxation. “Companies pay corporation tax on profits compared to individuals who pay income tax. Corporation tax rates are significantly lower than income tax rates for bigger landlords,” says Jack Reid, founder, Orlando Reid. “The cost of finance for residential properties (interest, loan arrangement fees, etc.) is not fully deductible from the rental profits for the individual landlords (restricted to 20% tax rate), whereas it’s fully deductible for companies.” Capital gains tax is also less for companies compared to individuals.

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As well as tax, there are also legal benefits. “Holding the property in a limited company can provide asset protection for the owner(s). This means that the personal assets of the owner(s) are protected in the event that the property is sued or subject to any legal claims,” says Byron Cole, Property and Business Expert. “A limited company is a separate legal entity, which means that the liability of the owner(s) is limited to the amount of capital they have invested in the company. This can help protect the owner(s) from any financial losses related to the property.”

Transferring ownership is also much easier in a limited company than as an individual. “This can be beneficial if there are multiple owners, or if the property is intended to be passed down to future generations,” adds Cole.

The Cons

It’s not all good news though. There are several downsides to putting properties in a limited company, especially if you already own them. “When you transfer a property from an individual to a company, you will have to pay stamp duty (SDLT) again,” says Reid. “However, good accountants can help you plan to save stamp duty. For example, transferring multiple dwellings (6 or more properties) will reduce the SDLT rate considerably.”

Another major disadvantage is that it’s likely you’ll have to change your mortgage if you have one and, while you can offset more of the interest, you’ll get a less favourable rate. “If you have a residential mortgage, this will need to be re-mortgaged to a commercial agreement which will have higher interest rates,” says Tim Hassell, MD, Draker Lettings.

There’s also a significant amount of extra paperwork that comes if you opt for this structure. “With a limited company comes another level of compliance. Companies House filings etc,” says Lane.

How do you go about setting up a limited company?

The main thing is that you need to call in the experts. While setting up a limited company isn’t especially complicated, it does involve several steps and requirements, and you can get into serious trouble with HMRC if it isn’t done correctly. “[It’s] fairly easy if you have a good accountant and conveyancing lawyer,” says Reid. “[It’s] more complicated to do by yourself if you are not familiar with how to set up a company or tax regulations. Good accountants will set up the company for you, draft the tax planning for the restructuring, and liaise with the lawyers to implement the tax plan when transferring the properties to the company.”

Depending on the size of your portfolio, the process should only take around four months from start to finish but, don’t be tempted to rush it through or mistakes will be made.

Lane also warns: “Be aware of promoters of planning arrangements that appear to get around all the problems associated with incorporation… HMRC are good at identifying property transactions gone wrong and whilst they take a while, they do eventually seem to pick up on them!”

What type of landlord does a limited company work best for?

Everyone’s situation and property portfolio are unique, so you need to weigh up the advantages and disadvantages for your own personal circumstances before making a decision. In general, the bigger your portfolio, the more likely you are to see the benefits of moving to a limited company structure but that doesn’t mean it won’t work if you only own one buy to let too.

“If a person only has one property but has realised a limited company might be the better structure for them, they need to consider the costs associated with incorporating against the benefits, says Lane. “Normally, incorporation is undertaken for an existing portfolio because it is easier to demonstrate the existence of a business thereby claiming incorporation relief. This might be more problematic where the shareholder to be only owns one property. However, there could be many good reasons for getting one property into a limited company, for example estate planning.”

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