Should Landlords Operate Through A Limited Company: Benefits and Drawbacks

Unincorporated landlords have been hit hard by a number of tax changes in recent years, including the gradual restriction in tax relief for mortgage and finance costs, such that relief is now only available as a tax reduction given at the basic rate. As this restriction does not apply to companies, a natural question is whether it is better for a landlord to operate through a limited company?

As with many questions, the answer is ‘it depends’. Whether operating through a limited company is a more tax-efficient option will depend on a number of factors including:

whether the landlord has an existing portfolio or is a new landlord;
the rate at which the landlord pays income tax;
the amount of profit the landlord will need to withdraw from the company for personal use;
whether the landlord lets, or is planning to let, residential or commercial properties,
the level of borrowings that the landlord has; and
the tax and other costs of transferring an existing portfolio into a limited company.

Advantages And Disadvantages Of Operating Through A Limited Company

As with most things in life, there are advantages and disadvantages to operating through a limited company. These are considered below. In deciding whether operating through a limited company is more beneficial, it is necessary to weigh up the advantages and the disadvantages, and crunch the numbers.

Advantages Of Operating Through A Limited Company

One of the main advantages of operating as limited company is that finance costs are fully deductible in computing profits, rather than relief being given as a tax reduction. This is a significant driver to incorporation.

Profits made by a company are chargeable to corporation tax. At present, the rate of corporation tax at 19% is lower than the basic rate of income tax, at 20%. However, it should be noted that this is due to rise from 1 April 2023 for companies with profits in excess of £50,000. However, even with the increase, the rate of corporation tax will still be significantly lower than the higher and additional rates of income tax.

On the sale of a property held by a company, any chargeable gain is taxed to corporation tax, which at the current rate of 19% is lower than the rate payable by individual landlords who pay tax at the higher or additional rates. Further, unlike individuals, companies do not need to notify HMRC of residential property gains within 30 days and make a payment on account of the capital gains tax due on the gain within the same timescale.

Operating as company also offers the added attraction of limited liability.

In summary, the following advantages are available to landlords operating through a limited company:
corporation tax (at 19%) is paid on profits rather than income tax (at 20%, 40% or 45%); • the rate of tax is the same, regardless of the level of profits;
finance costs are fully deductible in computing profits;
chargeable gains are taxable to corporation tax (at 19%) rather than capital gains tax;
the company has limited liability.

Disadvantages Of Operating Through A Limited Company

Despite the obvious attractions of operating as limited company, as listed above, there are disadvantages too. One of the main disadvantages is the potential tax charge that may arise when profits are extracted from the company. As the company is a separate legal person, distinct from the shareholders who own it, if the shareholders wish to use the profits personally, rather than leave them in the company, they will need to be extracted. This may give rise to a personal tax liability on the recipient, and possibly a National Insurance liability for both the company and the recipient if profits are taken as a salary.

Unlike an individual, a company does not have a personal allowance, so all profits are taxed. Companies cannot benefit from the £1,000 property allowance available to unincorporated landlords.

Similarly, there is no annual exempt amount for capital gains, so any gain is taxable in full. Further, any personal capital losses cannot be set against a gain arising on the disposal of a property held by a company.

There is also the issue of the annual tax on enveloped dwellings to consider where residential property is held by a limited company and the company is unable to benefit from any of the available reliefs or exemptions.

In addition, where the landlord already has a property portfolio, the up-front tax costs of transferring the property to a limited company can be significant.

The need to file accounts at Companies House and file a confirmation statement annually, as well as the costs of setting up a limited company, will mean the administrative costs of operating as a limited company are likely to be higher than for an unincorporated property company.

In summary, the potential disadvantages of operating a property business as a limited company are as follows: