Changes in tax, stricter regulations and a stronger focus on compliance: the property industry has seen a strong push towards the professionalisation of landlords over the last few years, and more changes are on the horizon. Consequently, landlords are looking at new ways to manage their property business.
A trend that’s growing in popularity among landlords is buying properties through limited companies, evidenced by the fact that a record number of buy-to-let limited companies have been set up in the past few years, including 47,400 in 2021 alone. Ultimately, landlords are turning to this business structure to be more tax efficient and get better returns on their investment, but running a company also brings additional responsibilities to consider.
Ever since the tax relief changes, introduced in 2017 with Section 24 of the Finance Act 2015, came into force in 2020, private landlords have increasingly moved across to a limited company structure to make their operations more tax efficient.
Previously, private landlords could claim all of their mortgage expenses as a business expense, but then rules gradually reduced and, ultimately, eliminated this tax benefit. On the other hand, the limited company structure does allow landlords to claim mortgage interest as a business expense.
Additionally, higher-rate taxpayers can also save money through limited companies because of the different tax requirements for companies and individuals. Where private landlords pay income tax on their rental income plus any other income they get, those with limited companies only need to pay corporation tax on its profits.
Naturally, there are some caveats that come with buying through limited companies.
A trend that’s growing in popularity among landlords is buying properties through limited companies, evidenced by the fact that a record number of buy-to-let limited companies have been set up in the past few years, including 47,400 in 2021 alone.
Landlords open themselves up to greater tax implications when choosing how to manage their income: should they pay themselves a salary or receive dividends? The salary taken from the company will be subject to income tax and National Insurance, while dividends have lower tax rates and no National Insurance. There are a number of implications for choosing the one over the other, and landlords are likely to need professional advice on this matter.
Another factor to consider is whether landlords are acquiring properties through their limited company, or transfer their existing properties from themselves as individuals to the company. Landlords must essentially ‘sell’ their owned property or properties to their company, which comes with all the usual costs, including capital gains tax, stamp duty land tax and conveyancing and solicitor fees.
The key to staying on top of various financial obligations, for both private landlords and those with limited companies, is real-time visibility. Our research found that one-third (3 3%) of landlords are still using spreadsheets to manage their finances, with a further 12% using paper and physical files.
Landlords who are considering managing a property investment through a limited company will need more robust processes and more reliable systems to stay on top of the additional responsibilities (and admin work) required of a company director. This means waving goodbye to offline reporting methods such as spreadsheets and physical files, and adopting a real-time digital alternative that delivers clear oversight of all financial activity.
Buy-to-let limited companies can help landlords take their property business to the next level, but the trade-offs and implications of starting a company should not be underestimated.
Marco Ferrari is co-founder and chief operating officer at Hammock
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