Should a landlord start a limited company or stay a sole trader?

 

As a landlord, you are running a business. This means you must ensure that you take the necessary steps to succeed. One of the most critical decisions is starting a limited company or remaining a sole trader. Both have merits and drawbacks, so let’s look at the pros and cons of both options.  

Exploring the benefits of setting up a limited company for buy-to-let landlords  

If you’re a landlord, you probably already know about the tax benefits of buy-to-let properties. A limited company is now more appealing than ever for buy-to-let landlords due to changes in taxation and Stamp Duty.  

But did you know that setting up a limited company for your buy-to-let could help you maximise those benefits? Many property owners need to know the advantages of registering their rental property as a limited company, and doing so can offer considerable savings.   

Let’s look at why landlords should consider setting up a limited company and how to do it.  

The advantages of setting up a limited company  

Setting up a limited company for your buy-to-let offers numerous advantages over buying as an individual. For instance, when you purchase a property through a limited company, the stamp duty rates are much lower than if you were buying as an individual.  

Over the past four years, there has been a double-digit increase in buy-to-let landlords operating their businesses through limited companies. 

Companies House data shows that more than 47,400 new buy-to-let companies were formed across the UK in 2021. This is the highest number of unique company formations since introducing the tax changes resulted in more income tax being paid by sole traders. 

Changes in taxation

Additionally, profits from rental income are taxed at 20%, which is significantly less than the higher tax rate charged to individuals on their earnings from buy-to-let properties. 

In the past, landlords who owned buy-to-let properties could claim back interest when filing their Income Tax returns and effectively received 40% tax relief on mortgage payments. From April 2020, under the new system, landlords receive a tax credit based on 20% of their mortgage interest payments. This means that the credit only refunds tax at the basic 20% rate rather than the top rate of tax paid.   

The new rules, while less obvious, could force some landlords into a  higher tax bracket because they'll need to declare the income used to pay the mortgage on their tax return. This could push their total income into the higher or additional rate tax brackets, depending on their income from other sources, such as salary or pensions. 

Landlords who set up a limited company can save thousands of pounds yearly in taxes and other costs associated with owning rental properties. To find out how else you can cut costs and save time as a landlord, our branch teams are here to help.

How to set up your limited company  

If you’ve decided to set up a limited company for your buy-to-let business, several steps are involved in getting started: 

• Decide on an appropriate name for your business and register it with Companies House; 
• Apply for HMRC approval; 
• Set up appropriate accounting systems; 
• Register any employees or contractors;  
• Process payroll information;  
• File annual accounts and returns; 
• Keep accurate records on all aspects of the business operations;  Pay corporation tax quarterly or annually depending on earnings and expenses incurred from renting out property through your limited company entity;  
• Ensure compliance with all relevant regulations in relation to lettings activity conducted through your private rental business entity (limited company).   Our fully Managed Services can ensure you stay compliant.

Setting up a limited company for your buy-to-let has numerous advantages over buying as an individual, ranging from reduced taxes to increased protection against liability issues related to tenants or third parties involved in lettings activity through your private rental business entity (limited company).  

Limited company pros and cons   

While the process involves some paperwork and administrative overhead, it is well worth it if done correctly.  Starting a limited company can offer protection for your personal assets if there are any issues with your business.  

It also allows you to access more tax-efficient options, like claiming tax relief on certain expenses such as travel and utility costs.  

However, it also comes with some downsides. For example, more paperwork is involved in setting up and managing a limited company, which can be time-consuming and expensive.  

Additionally, it requires more accounting expertise than being a sole trader. Depending on your skill set, this may have to be paid for.

Sole trader pros and cons 

On the other hand, staying as a sole trader offers more flexibility when it comes to taxation and paperwork. You file only one tax return instead of two for yourself and your company.

Additionally, you don't need to worry about complicated legal documents like shareholders' agreements or articles of association which keep everything in check when operating as a limited company.

The downside is that you cannot protect your personal assets from any potential legal issues with your business since they are all linked under one name—yours! 

Final thoughts 

Ultimately, depending on their situation, it's up to each landlord to decide whether starting a limited company or staying as a sole trader is best for them. If you're looking for the most tax-efficient option while protecting your personal assets from potential liability, then starting a limited company may be the way forward.  

Alternatively, remaining a sole trader might be more appropriate if you are okay with sacrificing this level of protection in exchange for simplified paperwork.  

Whichever route you choose, make sure that you do plenty of research to make an informed decision about what is best for you and your property business!