Setting up a limited company for rental properties can be a great idea for landlords with a large portfolio, but it’s a big step to take — so you need to make sure it’s the right path for you.

To help, we wrote this blog post, which will take you through the pros and cons of setting up a limited company for rental properties so you can make the right decision for you.

What is a limited company?

A limited company is a type of business that is legally separate from its owners (shareholders) and the people who run it (directors). That’s opposed to sole traders, who are not legally distinct from their business.

So, a limited company can enter contracts in its own name, and is responsible for its own actions, debts and liabilities. It can sue and be sued.

Meanwhile, the owners of the company enjoy limited liability, which takes us to the first advantage of managing your property portfolio through a company.

Advantages of a limited company for rental properties

Limited liability

Limited liability refers to the legal protection that shields the owner of a company from personal liability for the company’s debts and obligations.

So, if a business faces financial difficulties or legal issues, the owners’ personal assets are not usually at risk beyond their investments they put in. This alone makes limited companies an attractive option for many landlords.

Better tax position

Running your business as a limited company also comes with tax benefits, especially for higher-rate taxpayers.

This is because when you own a property in your own name, your profit is added to your other earnings and faces an income tax charge, which could be as high as 45% for higher portions of your income.

A limited company, on the other hand, pays corporation tax, which is charged at 19% for organisations with profits of £50,000 or below and 25% for companies making £250,000 or more. Profits between the two limits are charged an effective rate between the two percentages.

However, as the owner of a company, you would have to pay yourself a salary, which may be subject to income tax. Fortunately, you can usually pay yourself in dividends, which are taxed at a lower rate, allowing you to take home a larger chunk of your profits than many sole traders.

Section 24 does not apply

Section 24, a tax change announced in 2015, means that private landlords can claim tax relief on mortgage interest and other financing costs — but only at the basic rate of income tax.

That’s a dramatic reduction in the amount of tax relief landlords received before the Government enacted the changes in 2017 — full tax relief on financing costs — with higher-rate taxpayers being hit the hardest.

However, section 24 does not apply to limited companies, meaning they can continue to claim tax relief on the full amount of mortgage interest and other financing costs to reduce their tax liabilities.

Disadvantages of running a limited company

Additional legal responsibilities and costs

While running a limited company has its benefits, it also comes with some significant disadvantages. First, there are extra additional legal and financial responsibilities to contend with.

For example, as the director of a company, you’ll legally be required to keep accurate financial records and submit the appropriate accounts and returns to Companies House and HMRC. Starting a company, or incorporating an existing business, can also be complicated compared to becoming a sole trader.

Then you have to maintain communications with shareholders and stakeholders, and ensure all discussions and decisions are accurately recorded.

However, you can hire a company secretary to take on these tasks for you, or outsource the role entirely.

No capital gains tax allowance when selling

Part of being a landlord is knowing when to sell your property, and if you make a profit when selling, you may need to pay capital gains tax.

Usually, you will get a tax-free allowance, limiting the amount of tax you pay. However, limited companies are not entitled to the allowance because they pay corporation tax on capital gains. Make sure to account for that when it’s time for you to sell.

Furthermore, when you incorporate as a company, you will need to transfer your properties to your company, which could trigger a capital gains tax charge.

Unsure of the approach to take?

Every property portfolio is unique, so always make sure to speak with an accountant or business adviser before you set up a limited company to make sure it’s the right choice for you.

Talk to us about your property portfolio and advice on setting up a limited company for rental properties.