Several tax changes in recent years have seen many residential landlords reconsidering the way their rental business is structured.

In particular, recent reductions to mortgage interest relief could make it worthwhile for some landlords to set up their business as a limited company.

Where previously, landlords could deduct 100% of their finance costs from their property income before tax, this measure has gradually replaced the relief with a basic-rate tax reduction.

From April 2019, landlords will only be able to deduct 25% of their finance costs, with the other 75% given as a basic-rate reduction.

As these changes only apply to individuals, those operating through a limited company are exempt. Incorporating comes with its own tax implications, however, so the decision is not always clear-cut.

To choose whether to operate as a sole trader or set up a limited company, you’ll need to consider your individual circumstances and weigh up the tax differences between each option.

Tax on your profits

If you own a property personally, you’re liable for income tax at your marginal rate on your earnings from it. Depending on your income tax band, this could be paid at 20%, 40% or 45%.

In comparison, when you hold your property in a limited company, you’ll be liable for corporation tax on the profits instead. This is currently set at 19%, providing a potential tax saving compared to operating as a sole trader.

That said, you’ll still need to pay tax on profits you take out of the company, so talk to us for advice.

Transferring property to a limited company

Things become a little more complicated if you already have a rental property and want to transfer it to a limited company.

As this essentially means you’re selling the property to your company, it may incur a capital gains tax charge.

On top of this, your company may need to pay a surcharge of 3% on top of the normal stamp duty rates if buying a new residential property means you’ll own more than one.

Depending on your current tax situation, these extra costs could outweigh the advantage of forming a limited company as an existing landlord.

Passing on your property

One potential advantage of holding property in a limited company is its additional flexibility when it comes to inheritance tax.

In some cases, it could qualify for business property relief – but this is a complex area and requires specialist advice. Speak to us for help with estate planning.

Other issues

Along with various tax considerations, there’s another factor to think about before you set up a limited company – the administrative burden.

Limited company directors have more record-keeping and reporting responsibilities than sole traders, and it’s important not to overlook the time this might take up.

Get in touch

We can talk through your plans for your rental business, determine the best structure to suit your needs, and help with each stage of setting up a limited company if that’s the most appropriate route.

Contact us on 01628 631056 or email for more information.