Lettings is a significant part of our business. Less visible perhaps than our estate agency sales department, our rental division, headed up by Lettings manager Danielle Cameron, prides itself on offering a professional, seamless, end-to-end service. For those already in the lettings sector and for those considering entering the arena, the trading styles and arrangements to adopt are fundamental.
With over 400,000 buy-to-let companies now operating in the UK, a record number of landlords are choosing to purchase and manage rental properties through limited companies. According to a recent article from This is Money, the number of incorporated landlords has more than doubled since 2017, primarily driven by tax changes, mortgage restrictions and portfolio expansion strategies. But is going down the limited company route right for you?
Let’s explore the pros and cons and what you need to know before setting one up.
Pros of a Limited Company
Corporation Tax benefits
One of the most significant advantages is the tax benefits. Limited companies pay corporation tax on profits (ranging from 19% to 25%), which can be significantly lower than higher-rate income tax for individuals. For landlords receiving sizeable rental income, this could lead to substantial savings.
Full mortgage interest relief
Private landlords can no longer deduct all mortgage interest from rental income before calculating tax. Instead, they receive a flat 20% tax credit. However, limited companies can still deduct 100% of mortgage interest as a business expense, a key reason many investors opt to incorporate. As mortgage interest is a legitimate business expense for limited companies, it can be fully deducted, allowing landlords to retain more of their rental income.
Portfolio growth
According to Landlord Today, 73% of landlords with more than 11 properties plan to buy through a limited company. It’s a popular structure for those scaling up because profits can be reinvested directly into the company, avoiding personal tax until dividends are drawn.
Estate planning and succession
Owning property via a company structure can simplify inheritance tax planning, allowing shares in the company to be passed on rather than the property itself, which can offer more flexibility in estate planning.
Cons of setting up a Limited Company
Initial setup and transfer costs
Landlords who restructure existing portfolios into a company often face a hefty tax bill unless carefully planned. If you already own property in your name, transferring it to a company can trigger Capital Gains Tax (CGT) and Land and Buildings Transaction Tax (LBTT), which is potentially very costly. While Incorporation Relief may be available, it comes with strict criteria, such as running the property portfolio as a business.
Higher mortgage rates and fewer products
Buy-to-let mortgages for limited companies often come with higher interest rates, stricter lending criteria and fewer available options. Though more lenders are entering the market, individual landlords still typically get better deals. Average interest rates on limited company buy-to-let mortgages remain higher than those offered to individual landlords.
Ongoing administration and costs
Running a limited company entails various legal responsibilities, including filing annual accounts, submitting corporation tax returns, paying accountants, and ensuring proper record-keeping. This admin can add time and financial costs.
Summary: Is it worth it?
The shift toward limited companies is certainly gaining momentum, and for good reason. Increasingly, our landlord clients are taking this approach. For landlords planning to expand their portfolios, maximise tax efficiency, and keep more rental income, the benefits of incorporation can outweigh the drawbacks, particularly when starting a fresh business or buying new properties.
However, for landlords with just one or two properties or those concerned about mortgage costs and admin, sticking with personal ownership may still make more sense.
Finally, but vitally, before making the switch, it’s crucial to:
- Speak to a property tax advisor or accountant. If you don’t have one, we would be happy to refer you to one.
- Consider the long-term goals of your rental business
- Evaluate the short-term costs vs. long-term savings
Disclaimer: This article does not constitute financial advice; it is for informational purposes only. Seek professional advice on your situation.