Is now the time to become a limited company landlord?

Being a landlord is about running a profitable investment, but for some, it is becoming harder to protect margins and generate a meaningful income. Now is a good time to examine your landlord status  – is it best to be a private operator or a limited company?

Before we delve into the recent trend for limited company landlord status, let’s set the record straight about property investment. Of 700 landlords questioned by BVA BDRC for Paragon Bank, 47% of property investors who owned between 1 and 5 rental homes planned to buy a further buy-to-let property or properties over the next 12 months, confident that rental demand will continue to grow in the UK.

With investors remaining active, thoughts turn to gaining a financial edge in a sector that seeks to strategically tax the private landlord. The same Paragon Bank research found the number of buy-to-let landlords planning to purchase properties through a limited company structure has increased every year for the past three years. 

It appears the desire is specifically growing in 2022. Of those questioned by Paragon, 50% of landlords in the first quarter of the year intended to buy as a limited company. This figure had risen to 62% in the second quarter. Portfolio landlords are most likely to follow the limited company path, with 78% of landlords who own six or more properties planning to use this set up for their next purchases.

So why are an increasing number of landlords turning their back on private landlord status? Many are using limited companies as a way of reducing costs and improving profit margins. It isn’t for everyone, however, and landlords need to undertake thorough research specific to their individual circumstances before any switch is made.

The biggest advantage to operating as a limited company lies in the rate at which profits are taxed. While private landlords pay income tax on their rental profits, limited company landlords pay corporation tax. Currently, the basic rate of income tax is 20%, the higher rate is 40% and the additional rate is 45%. Conversely, corporation tax currently stands at 19%. 

It’s worth remembering that corporation tax rates can go up as well as down and any increase may wipe out a tax advantage. In fact, there are scheduled hikes to corporation tax planned for 1st April 2023. Limited company landlords earning more than £50,000 from their property investments will be taxed anywhere between 20% and 25%, although a change in Conservative leadership and a possible snap General Election may delay or alter this planned raise.  

Another advantage of operating as a limited company makes itself known when it comes to completing tax returns. New property tax rules phased in between 2017 and 2020 saw private landlords lose the ability to deduct mortgage interest payments from their income. This left many landlords with a more expensive tax bill, and it has also pushed some landlords into a higher tax bracket. Landlords operating as a limited company, however, remain able to offset the full interest amount against their profits, as the interest is deemed a deductible expense. 

There are other advantages to becoming a limited company landlord. Many prefer the simpler taxation applied when property investment assets are sold – a limited company landlord doesn’t have to pay capital gains tax but they will have to pay corporation tax, which is felt by many to be a simpler payment. 

There’s also less personal exposure when buy-to-lets are held within a limited company, as all personal assets are separate. In addition, there are a number of ways to pay yourself an income when operating as a limited company – many of which allow for a more tax-efficient existence. 

Before you join the increasing number of limited company landlords, familiarise yourself with your own circumstances. If you are a basic rate taxpayer, only own one buy-to-let property or don’t have time for an increased level of business administration, you may benefit from staying as a private landlord. 

Becoming a limited company property investor should only be done in tandem with independent taxation, financial and property advice. Contact us if you would like to speak with an impartial expert.