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Nearly two-thirds of landlords intend to use limited companies for BTL

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The trend continues for landlords to invest in buy to let property by way of purchasing through a limited company.

An article in Landlord Today on the 6th of November confirmed the upward trend towards incorporation not only by landlords with major property portfolios but, also by those with much smaller investments.

Some 65% of landlords holding portfolios of eleven or more buy to let properties, for example, have indicated that they intend to use a limited company to purchase their next property. What is more, even 62% of landlords owning up to ten properties are now also saying that they intend to incorporate their buy to let business before buying their next property.

When we described this trend towards incorporation in a posting on the 16th of August, we noted that some 55% of all landlords proposed to buy their next buy to let property through a limited company they had formed. 51% of those landlords with portfolios of fewer than eleven properties then said they would buy through a private limited company – that 51% has now risen to 62%.

Why incorporate?

The attractions for landlords in incorporating their buy to let have risen in inverse proportion to the steady erosion of income tax relief on mortgage interest repayments.

As the latter relief has been removed, so corporation tax (at its current rate of just 19%) may prove more favourable. For a private limited company, mortgage interest repayments may be deducted from your profits before paying corporation tax at just 19%. The alternative – if you have not incorporated – is to pay income tax at the basic rate of 20% (on earnings up to £50,000), the higher rate of 40% (if you earn between £50,000 and £150,000), or the additional rate of income tax on incomes in excess of £150,000.

Those benefits, of course, need to be set against the costs of incorporation. These are likely to include:

  • the cost of remortgaging any existing buy to let properties you own following their transfer from private into corporate ownership – any remortgage repayments may prove higher than those on your current buy to let mortgage;
  • accountants’ fees – to audit the accounts of both your new company and the personal incomes of its directors and your shareholders;
  • the legal costs in setting up, registering your company, and filing an annual return to Companies House – these are likely to be relatively modest;
  • the cost of maintaining a registered office – probably the address of your accountants, since the majority of buy to let landlords are unlikely to want to use their home address; and
  • any costs involved in your switching from a personal to a business account with your bank.

An article by Listen to Taxman on the 4th of November, however, warned that incorporation is no magic wand and that the financial benefits may take several years to realise. Generally speaking, it is likely to be appropriate only if you are earning a high income from your buy to let business and own more than just one or two properties.