In the last few years, increasing numbers of landlords have decided to incorporate, transferring their existing property portfolio to a new company.

According to estate agent Hamptons, 47,390 new buy-to-let companies were set up in 2021, compared to 24,190 in 2017.

That trend looks set to continue, with the total number of landlord limited companies surpassing 300,000 this year.

If you currently own buy-to-let properties as an individual, you might wonder whether this is the right choice for you. The answer is that it could be – but only with careful consideration.

Advantages of a limited company for landlords

The main advantage for landlords setting up a limited company is the potential to lower your tax bill.

Corporation tax, for one thing, is charged at a lower rate to income tax, at 19% on your profits compared to the 20% basic rate, 40% higher rate or 45% additional income tax rate.

You then have plenty of flexibility when it comes to paying yourself from your company profits – you can take a salary or dividends, as well as making contributions to your pension as company director.

It also means that a series of recent changes to tax on individual landlords will no longer apply to you.

For example, mortgage interest relief used to allow landlords to deduct the full cost of their mortgage interest from their income before arriving at their final property profits. This also included other finance costs like mortgage fees or interest on loans to buy furnishings.

This made owning a rental property as an individual a tax-efficient choice for many people, significantly reducing the profit they needed to pay tax on.

This relief was gradually reduced between 2017 and 2021, being replaced with a basic-rate reduction. As of 1 January 2021, this means landlords are only entitled to a 20% reduction on their finance costs.

Disadvantages of a limited company for landlords

Given the tax advantages of a company, you might think making the switch is the obvious choice. But there’s a little more to it.

For one thing, landlords should take the same cautions as any other business when creating a company. Limited companies come with a significantly higher level of regulation and admin compared to operating as an individual, and you’ll have more record-keeping, accounting and reporting obligations than before.

Another major issue to consider is the tax implications of transferring ownership of your existing properties. When you create a company, you’re establishing a new entity that’s separate from you – so if you want to manage your properties to it, you essentially need to sell the properties you personally own to your company.

If the property’s value has increased since you bought it, this could mean you as an individual need to pay capital gains tax on the difference. Your company, meanwhile, will need to pay stamp duty on the purchase.

Should you do it?

When faced with the tax charges above, many buy-to-let landlords are put off from making the move to a limited company and transferring ownership of their properties.

As scary as the upfront cost might look, however, it’s often worth considering whether a limited company is still worth it in the long term. Over time, those income tax costs can add up – and depending on your situation, the savings you make over the years could outweigh the initial cost of transferring the property.

That’s why it’s vital to get expert advice based on your financial position before you make the choice one way or the other.

A good accountant can also handle the administrative side of running a company, so you’re not left with extra paperwork.

At Smith Butler, we offer specialist property management accounting advice and services, helping you find the best way forward for your portfolio.

Get in touch to find out more.