Landlords Create Limited Companies to Run Buy-to-Let Properties

Many landlords across the UK are opting to create limited liability companies to manage their buy-to-let property portfolios. Although this is becoming more and more popular, there are some considerations that need to be taken into account before taking that step.

According to data provided by Hamptons, there were in total 41,700 new limited companies formed for this purpose, a leap of 23% since 2019. This trend looks set to continue, but is it the best choice for BTL landlords, and what are the considerations that need to be looked at?

Tax relief

When operating through a limited company, landlords are able to claim mortgage interest relief and are subject to a lower income tax rate due to the fact that they will be paying corporation tax as opposed to paying income tax on any profits made.

Private landlords are restricted when it comes to mortgage interest relief, which for them is limited to the basic rate of income tax, meaning all earnings from rental will be subject to taxation.

Typically, due to high mortgage interest rates, the advantages of setting up a limited company for BTL properties tend to be more beneficial to those in a higher income bracket or landlords with large property portfolios. It’s always vital to speak to an expert tax advisor before making a decision.

Interest rate increase

Over the last few years, we have seen low-interest rates, which has resulted in finance costs being kept to a minimum. However, with the recent interest rate increases from the Bank of England and the rising cost of inflation, we can expect to see rising interest rates on the property market too.

The impact on landlords will be significant due to the expected rise in interest rates once their fixed interest rate period comes to an end.

Property market trends

Post-pandemic lifestyles for many UK citizens have seen significant changes in the way people live and work. Priorities in what buyers are looking for have shifted, with many continuing to work from home on a full-time or part-time basis. There has been a marked increase in people moving out of big cities and opting to buy homes in towns and villages, making it important for landlords to do the relevant research and ensure that they are investing in the right areas.

Limited liability

Limited liability protects landlords’ personal finances and assets, meaning that landlord liability is restricted to the value of their financial investment in the company.

This liability can be further protected by taking out personal liability and personal indemnity insurance.

Reporting and record-keeping requirements

As a limited company, you are required to maintain up-to-date financial records, which must be filed at the end of each financial year. Company accounts and an annual tax return must be sent to Companies House together with the landlord’s usual annual self-assessment. A disadvantage of this is that it will almost certainly result in increased accounting costs.

Preparing for the future

It is important for landlords to know what their future plans are with regard to their rental properties. If they intend to pass on property ownership to a family member, then it is better to form a limited company, as it makes the process simpler and more tax-efficient.

Choosing the right mortgage product

Typically, mortgage rates for limited companies tend to be higher than those taken out by individual buyers. Despite this, there are specialist lenders that provide competitive-rate mortgages, which are best accessed through a whole-of-market broker.

It is important to note that the criteria for a limited company mortgage require the business to be set up in one of the following ways:

A trading company is usually a business already in existence that is planning to increase its assets by investing in buy-to-let property.

Special Payment Vehicle: a company set up for the express purpose of purchasing and managing buy-to-let properties.

Taking all the above into account will help landlords make the important decision of whether it is more or less advantageous to set up a limited liability company to manage buy-to-let properties. Employing the services of a tax expert and an experienced property broker will significantly increase the chances of making the right decision.