Should I transfer my buy to let properties into a limited company?

Nov 29, 2022 | Personal tax

An increasing number of landlords have chosen to incorporate in recent years, transferring their current property portfolio to a new company.

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

The total number of landlord limited companies is set to surpass 300,000 this year.

So why would a landlord do this? Is it worth it for you? Let’s find out.


The pros of limited companies for landlords

Lowering your tax bill is a very attractive reason to turn your property portfolio into a limited company.

Corporation tax is charged at a lower rate to income tax – 19% on your profits (25% for 2023/24 if you make above £250,000 a year) vs the 20% basic rate, 40% higher rate or 45% additional income tax rate.

With this comes flexibility for paying yourself from your profits through a mixture of a salary, dividends (taxed less harshly than regular income) and contributions to your pension as a company director.

Landlords have recently been subject to numerous tax changes – these now no longer apply to you.

Landlords previously had the option to deduct the whole cost of their mortgage interest from their income before calculating their ultimate property profits thanks to mortgage interest relief. Additional financial expenses, such as mortgage fees or interest on loans used to purchase furniture, were included.

This dramatically decreased the amount of profit that people had to pay taxes on, making owning a rental property as an individual a tax-efficient decision for many.

Between 2017 and 2021, this relief was gradually scaled back and replaced with a basic-rate cut. This implies that as of January 1, 2021, landlords will only be eligible for a 20% decrease in their finance expenses.

However, limited companies are not affected by this rule change, making renting through a company extremely tax efficient.


The negatives of limited companies for landlords

Like any change in business, caution is always advised, not least when creating a limited company.

Limited companies come with a much higher level of regulation and admin compared to operating solely as an individual. You’ll have to keep a closer eye on your records, accounting, and reporting in far more scrutiny.

There are tax implications, too. When you transfer your ownership of your existing properties into your new company, you’re creating an entirely new entity. This is separate from you, so you’re selling your properties to the company – they are no longer ‘yours’.

If the value of the property has grown since you purchased it, you may therefore be personally liable for paying capital gains tax on the difference. In the meanwhile, your business will be responsible for the purchase’s stamp duty.


Should you do it?

Many buy-to-let landlords are deterred from switching to a limited company and transferring ownership of their homes when confronted with the aforementioned tax penalties.

However daunting the first investment may seem, it’s often important to examine if a limited company will still be worth it in the long run.

Income tax expenses can pile up over time and depending on your circumstances, the savings you get over the years may be greater than the cost of transferring the property.

It’s critical to get professional guidance depending on your financial situation before making a decision.

To avoid having excessive paperwork, a qualified accountant can help manage the admin of operating a business.

We can help you work out the best decision for your properties. Get in touch to discuss things further.

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