Ladybird Living – Your London Estate Agent

Ladybird Living
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Oct 23 2023

Landlords: Limited companies on the rise

Limited company structures are gaining popularity among landlords, with Hamptons reporting that a significant 74% of landlords purchasing buy-to-let properties in 2023 have chosen this business structure.

What factors are driving this increasing preference?

Real estate agents are aware of the challenges in the rental market. Growing compliance requirements are compelling landlords to weigh the long-term prospects of investing in this industry. While the government is beginning to signal a more lenient stance towards landlords by ending plans for upgrading EPC requirements, mortgage costs remain high. Additionally, the repeal of section 24 has eliminated the ability to deduct mortgage interest from taxable rental income. Limited companies present a potential solution to address these challenges.

A Dilemma for Landlords:

Operating as a limited company entails paying corporate tax rates, which are lower than income tax rates. It also allows landlords to deduct mortgage interest expenses from the company’s income.

Securing a buy-to-let mortgage as a limited company may offer higher borrowing capacities with less stringent stress tests, although often at slightly higher interest rates compared to individual applications.

Benefits for Investors:

The majority of landlords with extensive property portfolios are likely in higher tax brackets. For these high-earning individuals, limited companies can be advantageous due to the reduced tax rates associated with a corporate structure.

Limited companies also benefit those seeking portfolio expansion. Profits can be retained within the corporate structure, enabling reinvestment without incurring income tax, making it an appealing option for landlords aiming to expand their real estate holdings.

Data from Paragon Bank reveals that many landlords are already capitalizing on this trend. In the second quarter of 2023, the average number of properties held within limited structures increased to 12.3, up from 7.8 in the last quarter of 2021.

Consideration of Alternative Costs:

Conversely, if landlords need to draw profits from their limited company to supplement personal income, they will face taxation on the withdrawn funds. When selling a property, capital gains tax allowances do not apply, and the minimum corporate tax rate of 19% must be paid.

Moreover, there is increased administrative work involved in maintaining financial records and accounts when operating as a limited company.

In summary, operating within a limited company structure is a strategic choice for landlords in it for the long haul, particularly those with larger portfolios or ambitions for reinvestment. Landlords with only one or two properties may discover that this approach entails more time and cost than anticipated.

The information in this post is valid to the best of our knowledge on the date of posting. It is advised that you seek independent advice based on your individual circumstances. 

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