What is incorporating?
Turning a property portfolio into a business isn’t anything new. Landlords created over 47,400 buy-to-let limited companies in 2021 — up from 41,000 in 2020 and 35,000 in 2019. And many more are likely to choose to do so this year too.
But why might landlords want to consider making the change to set themselves up as a business? Read on to find out more.
Why do landlords Incorporate?
Most landlords incorporate themselves to become more tax efficient and to give themselves security for the long-term. The benefits of incorporating tend to compound with the size of the portfolio, where a landlord with 100 properties is far more likely to benefit from incorporating than an accidental landlord with one property.
Is it worth incorporating?
Any landlord who has plans to expand their portfolio, or wants to meet specific financial goals, would likely prefer to do so through a limited company.
Landlords don’t necessarily need to set up an incorporation to rent out a property, but one upside is that their properties will become protected business assets, so they can’t be leveraged by creditors as easily as a privately owned property.
Benefits of Incorporating
Tax Benefits for incorporated landlords
Independent landlords pay income tax, while incorporated landlords pay corporation tax—the rates they pay depend on many factors, and differ from landlord to landlord.
However, corporation tax is usuallylower than income tax, which means many landlords would make immediate savings just by incorporating.
Also, corporations don’t need to pay capital gains tax, stamp duty or inheritance tax when transferring ownership of a property from one party to another—which means a landlord looking to downsize their portfolio could also keep more of the money from the transaction (minus corporation tax for taking money out of the business).
Tax Relief for incorporated landlords
The main advantage to paying tax through a limited company is that landlords can offset all of their mortgage interest against the rental income before paying tax, which can save a significant amount of money over the term of a mortgage.
Limited Liability for incorporated landlords
Corporations are subject to limited liability, which means a landlord’s finances as a business are separate entirely from their personal finances.
This means that in the case of a landlord’s business going bankrupt, or if the landlord broke the law (for example), limited liability would kick in, and limit the amount of money an incorporated landlord would have to pay.
Meanwhile, a private landlord has unlimited liability, which means they would need to pay a theoretically unlimited amount of money if they ran into significant trouble. This is why bigger portfolios with bigger risk are better off being incorporated.
Downsides of incorporating
Taxes and Accounts
Incorporating isn’t just plain sailing though. Landlords will need to file accounts and tax returns as a business, which does increase administration costs to the business.
Limited companies tend to need specialist advice from an accountant to manage their finances, which can get progressively more expensive as the size of the portfolio increases.
Meanwhile, money taken out of the business is subject to income tax, so incorporated landlords don’t automatically get “free” money just by withdrawing cash from their business!
Getting a mortgage
Buy-to-let mortgages are more expensive for limited companies because of the higher risk of lending to a company.
This is where limited liability is a drawback—banks don’t like the idea of a limited company being unable to pay back its mortgage, and not having to repay the initial sum. Therefore, landlords looking to expand their portfolio will likely have to pay a premium on any mortgage deal they find.
Incorporating as a business is a big decision, and it depends on a lot of factors. Any landlord considering transferring their portfolio into a limited company should firstly look into how it will affect their tax statement.
They should also have a plan of action for their portfolio in the next two, five and ten years—any landlord looking to expand their portfolio may prefer the security of a limited company, while a landlord who wants to significantly downsize may prefer staying independent.
As always, landlords should seek advice from professionals before making significant decisions about whether to incorporate.