Over the last few years, there’s been a noticeable increase in the number of landlords who are incorporating their property businesses.
Throughout 2021, 47,400 new buy-to-let companies registered with Companies House. Year-on-year, the number of buy-to-let company formations continues to grow – and following tax changes in recent years that have increased costs for many landlords, it would be no surprise if you were considering the same.
Before you do, though, it’s important to understand what incorporation will mean for you.
How do I incorporate my business?
If you decide to transfer your rental property to a company, you’ll first have to register a company and we can assist you with this process. Once you’ve paid your registration fee and provided your essential information, your company will be on the companies register at Companies House. This means your information will be readily available to the public, and you’ll have to work within the compliance guidelines of Companies House.
You’ll then need to think about transferring the property you already own as an individual to your limited company – we’ll explain more about the implications of this below.
Although some landlords find that incorporating can be a great way to run their business in a tax-efficient way, there are also a number of drawbacks to consider.
Benefits of a limited company
Depending on your personal tax position and the nature of your rental business, you could benefit from greater tax efficiency by transferring to a limited company. Once you’ve formed your company, you’ll be subject to corporation tax on your rental profits rather than income tax.
Currently, the primary corporation tax rate sits at 19%, but this is soon to change. As of April 2023, corporation tax will increase to 25% if your company has an annual profit of £250,000 or more. Company profits below £50,000 will still be taxed 19%, with profits between the thresholds subject to a taper.
Although this seems like a dramatic increase, it’s still less than you would pay if you were a sole trader paying the higher-rate tax at 40% or additional-rate tax at 45%.
This is therefore effective if you retain the profits in the company for future reinvestment. However, note that you’ll still be liable to income tax on salary or dividends that you take from the company and the combined corporate and personal tax charge could end up higher.
Forming a company also allows you to claim full tax relief on your mortgage interest costs. For individual landlords, finance cost relief was withdrawn between 2017 and 2021 and replaced by a basic-rate tax deduction. This has been a big driver in the shift to limited company formation.
Another benefit of transferring property to a limited company is the reduction of personal liability. If your property business becomes incorporated, you’ll have a separate legal identity from your company. This means if the company ends up making a loss, you won’t be completely liable as you would if you were a sole trader.
Downsides of transferring property
You might already be thinking about the tax savings you could make by incorporating – but don’t forget about the actual cost of transferring your property to a company.
You cannot simply transfer the property’s ownership. You have to sell it at market value to the company, which will incur extra costs.
Those charges could include:
- stamp duty land tax for properties in England and Northern Ireland: paid by your company on the purchase
- capital gains tax at 18% for basic-rate taxpayers and 28% for higher or additional-rate taxpayers: paid by you on
- the gain from the sale
- increased mortgage charges and early redemption costs
- legal fees.
As well as this, companies do not benefit from the annual capital gains tax exemption that is available to individuals, so a company will pay corporation tax on the full gain in property value when the property is sold. And remember that if you draw out the profits you’ll be liable to income tax on top.
In some circumstances, it could be too costly to incorporate: for example, if you only own one or two properties and make a decent income from them. Landlords with more extensive portfolios are often better off transferring their properties to a limited company. The best choice will vary, though, so it’s essential to seek professional advice before making a choice.
Unfortunately, incorporation also brings its share of paperwork as you’ll have to prepare annual accounts for Companies House and file your corporation tax return to HMRC every year, as well as keeping records up to date and fulfilling your duties as a company director.
Still trying to figure it out?
If you’re still unsure whether transferring your rental property to a limited company is worthwhile, it’s always best to talk to an expert advisor. We’ve worked with countless clients and helped them find the most tax-efficient ways to run their rental properties, so we can help you too.
Contact our team to discuss your rental properties.