Private landlord v. limited company: the pros and cons

Being a private landlord has been the norm in buy-to-let for many years but detrimental changes to property taxation since 2017 have led to an increasing number of landlords starting their own companies as a tax-efficient investment vehicle.

In fact, a survey commissioned by Paragon Bank found 50% of landlords questioned in Q1 of 2022 intended to purchase a buy-to-let as a limited company – a figure that rose to 62% in Q2 of this year. When it came to specifics, 78% of portfolio landlords – those who own more than six properties – are most likely to form a limited company to make their next purchase. 

If you’re tempted to make the change from private landlord to a limited company – or are wondering what set-up to adopt as you start your property investment journey – here are some points to weigh up:-

Pros and cons of a limited company landlord

Pros

• You can offset mortgage interest against the tax bill
• Pays corporation tax, currently at 19% and lower than income tax
• No capital gains tax to pay when an investment property is sold
• Tax bills can be lower for higher and additional rate tax payers
• Personal assets, such as a family home and car, are kept separate
•  Different tax-efficient ways of receiving property income

Cons

• Time required to set up, register and run a company compliantly
• Corporation tax is due on financial gains earned from a property sale
• Not entitled to use any capital gains tax-free allowance when paying corporation tax on profit 
• Accounts and tax returns are likely to be more complex, requiring a paid-for accountant
• Not always beneficial for basic-rate tax payers and single-property landlords
• Possibility of higher mortgage rates and more costly arrangement fees when borrowing using a limited company mortgage 

Pros and cons of being a private landlord

Pros

• Completes a standard self-assessment tax return, which is simple and can be self-managed for free
•  Can purchase an investment property using a standard buy-to-let mortgage
• Personal details are not released into public domains
• No need to submit articles of association

Cons

• No longer able to offset mortgage interest against the tax bill
• Currently pays income tax, which is either 20%, 40% or 45% of profit
• Personal assets can be compromised should the landlord get into financial difficulty
• Will not benefit from any reduction in corporation tax
• Rental income may prompt the payment of Class 2 National Insurance

Switching properties to limited company

Existing private landlords can transfer the properties they own to a limited company but the process is complex and expensive. Effectively, the owner has to sell the properties as a private landlord and their new company has to buy them. This process involves paying out twice, as the landlord must pay capital gains tax on the sale, while the company has to pay stamp duty – including the 3% surcharge – upon completion. Landlords considering this switch will need astute financial advice as to whether the limited company benefits will outweigh the double tax bill.

What does a change in Conservative leadership mean for landlords?

This is an interesting point. As it stands, landlords with properties in a limited company earning more than £50,000 will face a higher tax bill from 1st April 2023. From this date corporation tax will rise from 19% to between 20% and 25%, depending on a landlord’s personal circumstances.

Liz Truss – one of two candidates vying for the Conservative leadership position – has said she will scrap the planned corporation tax rise if she is elected. Rishi Sunak, the other remaining candidate, has had to be coy about his tax pledges. Sunak instigated the planned corporation tax rise, so vowing to cancel this hike would go against his own policies. He has, however, pledged to ‘get the tax burden down’ once he’s got a ‘grip on inflation’.

If you’re toying with the idea of becoming a limited company landlord, we strongly suggest you speak with an independent tax adviser as well as a financial expert.