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Report maintenance Why are landlords setting up companies for their rentals?
Over the last few years, landlords have been hit with new tax rules and costs from additional legislation, which can really start to eat into the return on investment. A lot of landlords are looking at ways in which they can reduce some of these outgoings. More and more are creating a company rather than owning the property directly. A GetGround poll in 2022 saw 75% of UK landlords have had at least one property within a limited company. This is often to help the landlord make savings on things like tax efficiency.
Is setting up a company a good option for you?
Well, it’s not quite as simple yes or no answer. It’s certainly not something you should jump into without working out whether it’s a viable and worthwhile option for you. For some, it can make a significant difference in the return they get from their investments. Whereas others can go through all that work for no gain whatsoever, or even be out of pocket.
Landlords on higher rate tax are taxed on their property earnings before their monthly mortgage repayment (if they have one). They do get a tax credit of 20% but that’s less than half the benefit pre-2020.
Having your rental properties within a company means you can continue to pay the buy-to-let mortgage before tax is deducted.
The benefit of holding within a company will be seen even more if you recently re-negotiated your mortgage deal or are about to. With rates much higher than 12 months ago, the amount you pay back per month will be higher when spread over the same payback period.
Is it all positive?
Well, no, with a company comes additional responsibilities and costs – hence why it’s worth doing the groundwork: –
- Mortgage rates – available company rates tend to be slightly higher than a standard buy-to-let mortgage available to yourself.
- Stamp duty – Already own the property? Transferring it into company ownership is seen as a sale – so you’ll be subject to the 3% surcharge on top of the usual stamp duty rates.
- Capital gains tax – yes, you’ll have to pay this if you are a higher rate (or above) taxpayer, and the value has gone up by more than your £12,300 annual CGT allowance (28% tax on the balance). More info on the gov website.
Our Chairman Jack’s thoughts: –
Obviously, if you don’t own the property already then you’ll avoid the last 2 providing you purchase it via the company. We asked Jack for his thoughts:-
“The Bristol rental market has changed a lot since I opened The Letting Game back in 2009. In particular, the changing health and safety requirements, changing economic climate and tightening legislation. The demands on a landlord’s finances and time have never been higher (shameless plug – we can help with this!) But, that’s not to say that it can’t still be financially and personally rewarding.
My view on setting up a company is that the more properties you own the more likely it will be of benefit to you. If you only own one rental or are turning your current property into a rental then work through the numbers. There is a good chance it won’t stack up, particularly with the stamp duty. If you own a wider portfolio, then I am seeing more and more people go down this route. I know it’s not always exciting, but I really would get a spreadsheet out and work it through before jumping in, and always consult with your accountant.”
