Pros and cons of setting up a limited company for landlords

There has been a growing interest in limited company buy-to-let since the government completely phased out mortgage interest tax relief for buy-to-let properties in April 2020. As corporate entities are not subject to the same tax relief restrictions, some landlords are considering whether using a limited company to run their business may be more tax efficient.

Setting up an SPV 

Most buy-to-let lenders will require the company is set up as a Special Purpose Vehicle (SPV) which is a type of limited company registered to trade in one principle activity. In the case of a buy-to-let property business, this would be a company that derives revenue from the letting of residential property. 

There are a number of SIC codes that are commonly associated with SPVs which can be used to register the new company and are normally accepted by buy-to-let lenders:

SIC codes

68100   Buying and selling of own real estate

68201   Renting and operating of Housing Association real estate

68202   Letting and operating of conference and exhibition centres

68209   Other letting and operating of own or leased real estate

68310   Real estate agencies

68320   Management of real estate on a fee or contract basis

Pros and cons of using a limited company

Pros

Cons

·       Mortgage interest is considered an expense and can be fully offset against rental income received ·       Profits within the company are liable to corporation tax rather than personal tax ·       Dividend allowance and directors' loans can make withdrawing profit more tax efficient ·       Profits can be re-invested to expand portfolio without additional tax ·       ​​​​​​​Options for inheritance tax planning between parents and children

·       There is no Capital Gains Tax (CGT) allowance when the company sells a buy-to-let property ·       Reduced number of mortgage lenders and products to choose as some high street lenders do not offer limited company mortgages or have fewer options ·       Cost of finance may be higher as some lenders charge a premium for limited company buy-to-let mortgages ·       Other costs associated with running a limited company such as preparing and filing accounts, auditing and legal fees.

Stamp Duty costs 

For existing landlords who are considering transferring their properties to an SPV it is recommended that you seek professional tax advice before proceeding. Moving properties from a personal name to a corporate entity involves a sale and purchase transaction which means that Stamp Duty Land Tax and Capital Gains Tax is payable. 

Stamp Duty costs may be a deterrent to large portfolio landlords, but there are circumstances where incorporation relief may be granted by the Inland Revenue if it can be demonstrated that the portfolio is run as a business partnership – again tax advice is recommended in this scenario.

Property Hawk Mortgages is a specialist in the buy-to-let mortgage market. We have a wealth of knowledge and are dedicated to helping UK landlords find the best financial products and services available to them.

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