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Why are some landlords incorporating their let business?

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With the beginning of the new tax year in 2020, any tax relief you might previously have enjoyed as a landlord on mortgage interest repayments will have disappeared completely. That relief has been phased out over a number of years, and now interest on borrowings will only be relieved at the basic rate.

The removal of that tax relief is tempting more and more landlords to incorporate their buy to let business as a limited liability company.

As we highlighted in December, almost two-thirds of all landlords owning portfolios of eleven or more buy to let properties intend to purchase any further acquisitions through a limited liability company. Of the remainder – those landlords owning up to ten such properties – 62% also plan to buy through a limited liability company.

Why has there been such a marked shift towards incorporation – and might you be tempted to do the same?

The advantages of incorporation

The Residential Landlords’ Association (RLA) explains that incorporation involves the transfer of ownership from the individual landlord to the company he or she has set up.

With that transfer of ownership, tax liabilities are also transferred to the company. Instead of paying income tax on the profits of the buy to let business, the landlord’s company becomes responsible for corporation tax.

For landlords privately owning buy to let property, income tax on earnings up to £50,000 a year are taxed at the basic rate of 20%; on earnings between £50,000 and £150,000 a year, you are taxed at a rate of 40%; and if you earn more than £150,000, you pay the additional rate of income tax of 45%.

As a limited liability company, on the other hand, the earnings from your portfolio of buy to let properties are taxed at a standard rate of just 19%.

Is it worth it?

Although there are tax advantages in forming a limited liability company for your buy to let business, the savings all depend on the rate at which you would be paying income tax.

Certainly, if you are in the higher or additional tax rate bands – of 40% and 45% respectively – those savings may appear well worth the effort.

If you pay income tax at the basic rate of 20%, however, the 1% saving by switching to corporation tax is doubtful. That is because there are several costs involved in setting up and maintaining a limited liability company:

  • the transfer from private to company ownership of your property, for example, might mean you having to remortgage – and pay the fees involved;
  • there are – relatively modest – legal costs involved in setting up the company, filing annual returns to Companies House and the regular fees you need to pay an accountant;
  • you might also want to maintain a registered legal address for the company – separate from your home address; and
  • might also need to consider setting up a business bank account for the company.

If you own a large portfolio of buy to let properties, are planning to expand, and your earnings take you into higher income tax bands, you may benefit from switching ownership of your portfolio to a limited liability company. If you own a single buy to let property, however, any gain is likely to be offset by the cost of setting up and maintaining a company.