Landlord tax relief: Is a limited company right for your portfolio?

Landlord tax relief: Is a limited company right for your portfolio?

Given the huge impact of recent tax legislation, it will probably come as no surprise to read that more than half of private landlords plan to boost their portfolios via limited companies over the next 12 months.

A study by Precise Mortgages found that 55% of landlords plan to buy property through limited companies – with only 24% planning to buy as individuals.

In late 2018, 44% planned to buy through limited companies, while that number had increased to 53% by the start of 2019.

And given the phased nature of section 24 legislation on mortgage interest tax relief will, in April 2020, come into force fully, the number of landlords running their portfolios through limited companies looks set to increase even further.

First, let’s look at what that means for private landlords…


Tax relief for landlords


Since April 2017, private landlords have only been able to claim tax relief on a portion of their mortgage interest.

Between April 2017 and April 2018, they could claim 75% of their mortgage interest costs, before that figure was reduced to 50% for the 2018-19 tax year.

Currently, landlords can claim 25% of mortgage interest and from April 2020, they will only be able to claim 20% basic tax relief on 100% of their mortgage interest.

So, what does it all mean for landlords?

Well, some could be forced into a higher tax bracket through the changes – despite their actual income, technically, not increasing.

And landlords already sitting in higher tax brackets are certain to pay more tax under the legislation.


The benefits of limited company purchases

While taxation for landlords purchasing properties independently comes under individual self-assessment, portfolios owned by a limited company are taxed through corporation tax.

And this is where landlords in higher tax brackets can benefit.

Corporation tax currently stands at 19% of operating profits, while this is set to reduce to 17% from April 2020.

And while landlords would continue to face individual tax bills for profits extracted from limited companies, these rates are far more appealing than those for standard income tax.


However, limited companies may not be for all landlords

While the taxation benefits of purchasing property through a limited company cannot be disputed, incorporation isn’t a total bed of roses.

While corporation tax rates are set to drop 2% from April 2020, like any kind of tax they could rise again in the future.

And given the recent political landscape, we certainly wouldn’t try to second guess the government.

Running a limited company also brings with it an increase in workload as well as some potential additional costs to consider.

Limited companies, no matter how small, have to submit yearly accounts with Companies House and these can be complicated if your talents lie in property rather than numbers.

Of course, you could (and probably should) draft in an accountant to compile your accounts, but this will bring with it an additional cost that could impact on your bottom line.

Moreover, while profit extraction through shareholder dividends is subject to generally more attractive tax rates than income tax, the profits have to be in the business after corporation tax liability in order to extract them legally.


Always seek independent financial advice

The complexities of running a limited company balance out the attractive tax benefits, so always think carefully about whether incorporation of your property portfolio is right for you.

For landlords with large (more than 10 properties) portfolios, a limited company would certainly appear to make sense.

But for those with smaller portfolios, incorporation could simply result in an increased workload without major financial benefits.