The Pros And Cons Of Incorporation For Landlords

What Incorporation Means For Landlords

As a landlord, you need to decide whether you want to operate as an individual sole trader or set up as a limited company, known as incorporation. As an individual, you pay income tax on what’s earned, while a company will pay corporation tax which is at a lower rate than income tax.

Incorporation is more likely to be beneficial for a landlord building a portfolio who doesn’t need the cash immediately, but what you decide to do needs to be based on your particular circumstances. Understanding the advantages and disadvantages of incorporation and obtaining professional advice is key.

A Growing Trend

The move to limited company status is a growing trend amongst landlords. According to Paragon’s Private Rented Sector (PRS) Trends report, the proportion of landlords planning to make their next buy-to-let purchase through a limited company rose from 50% in Q1 2022 to 62% by mid-year – the highest level in three years. The intention was even higher amongst landlords with portfolios of six or more properties where 78% said they would use a limited company structure for their next property investment compared to 47% of those with between one and five lets.

By the end of 2022, the number planning to purchase via a limited company had fallen back to 57% but rose again to more than six in ten in the first quarter of 2023 suggesting that it remains a popular choice for many.

3 Advantages Of Incorporation

1. Tax Relief

The most attractive advantage of incorporation is the tax benefits that can be gained. Tax changes that have impacted the tax relief claimable on residential property financing costs, coupled with increasing interest rates, have made the concept of ownership of property through a limited company a more efficient option for many, since limited companies can still claim full tax relief for their financing costs.

• Tax Efficiency

As well as providing higher levels of tax relief, incorporation can also be more tax efficient for those landlords who want to leave more profit in the business for reinvestment and take a lower share of income. Their income tax liability falls and coupled with a relatively low corporation tax rate, this can ultimately mean a lower tax bill.

• Greater Protection

Another advantage is the protection offered. The limited liability status of incorporation helps to protect personal assets from claims in what is an increasingly litigious environment. This means what you own outside the business isn’t put at risk.

3 Disadvantages Of Incorporation

1. Higher Tax Charges Potentially

While there can be tax advantages there can also be significant tax charges if the incorporation decision comes without efficient planning and professional advice. This can include significant liabilities for capital gains tax and stamp duty land tax which larger-scale landlords may be able to get relief for, but smaller landlords may not. For example, to qualify for incorporation relief on Capital Gains Tax the limited company typically needs to be formed of five or more properties owned by the landlord for at least two years and which the landlord can prove they’ve managed.

• Higher Interest Rates For Borrowing

Although the tax benefits are there, interest rates for funding investment and expanding portfolios may also be higher for limited companies, which could wipe out the tax benefits gained. Your choice of mortgage lenders may also be impacted.

• Greater Compliance And Liabilities To Face

There are administrative costs and time needed to set up and run a limited company. Yearly accounts will also need to be prepared and filed and are just one of the paperwork obligations you will need to meet.

Deciding What’s Right For You

As we’ve said, incorporation isn’t a straightforward decision and it’s important to look closely at your business and to get professional advice on whether or not it suits you. HMRC suggests that, as a starting point, those considering incorporation should be spending at least 20 hours a week managing their portfolio – that is, it makes up a significant proportion of their working week.

We Can Help

At Progressive Lets, we are experts in the rental market in the Peterborough area and help landlords find and manage properties within a 50-mile radius. We work with landlords of all sizes, including those who are just starting out, as well as those operating as incorporated businesses and building their portfolios. Please get in touch to find out more.