Honourable and personal residential letting experts

31Jan

Setting up your portfolio as a limited company

At every seminar we have given over the years, the question of setting up your portfolio as a limited company is asked every time. The answer has always been –  it depends on the number of properties in your portfolio and how you set up things to start with. 

However, since 2020 we have seen more landlords structure their portfolios in this is way. Hamptons reported in 2023 that 74% percent of landlords buying a buy-to-let property in 2023 did so under a limited company. 

Therefore, I thought it would be a good idea to look at the pros and cons again. Particularly in the light that the (present)  government is starting to drop hints that it is softening its approach to landlords, having scrapped plans to upgrade EPC requirements.

Since the repeal of section 24, which meant that mortgage interest can’t be deducted from the taxable income on a property, limited companies offer a potential solution to this state of play. 

What are the benefits?

  • Limited companies often have the ability to deduct business expenses from their taxable profits, reducing the overall tax liability.
  • Setting up under a limited structure means paying corporation tax rates, which are lower than income tax. It also means that landlords can deduct mortgage interest costs from the company’s income. Generally speaking, if a landlord owns a portfolio of properties, then they’re likely in a higher tax bracket. As a higher earner you could benefit more from the lower tax rates under a corporate structure.
  • Finding a buy-to-let mortgage as a limited company may also mean the ability to borrow more with lower stress tests – but often at more expensive rates than on an individual basis.
  • Limited companies can also be beneficial for those looking to grow their portfolios. Profits can be stored in the corporate structure.
  • The “limited” in Limited Company refers to the limited liability of its shareholders. This means that the personal assets of the shareholders are generally protected from the company’s liabilities. In the context of an investment portfolio, this protection can shield personal assets from potential legal claims related to the investments.
  • Structuring your investments through a limited company can offer more straightforward succession planning. Shares in the company can be passed on to heirs, providing a smoother transition of assets compared to individual ownership. Limited companies may offer more flexibility in managing inheritance tax liabilities. In certain cases, the shares in a limited company may qualify for Business Property Relief, potentially reducing or eliminating inheritance tax.

Other things to consider 

  • If you still need to use the profits held in your company to add to your own personal income, you’d be taxed again on any money you take out of the company.
  • If you need to sell a property, you don’t benefit from capital gains tax allowance, you’ll have to pay the minimum corporation tax rate of 19%. Plus, there would of course also be more administration, with financial records and accounts to keep on top of too.

Operating under a limited company is therefore a long game for landlords. Those with larger portfolios, or looking to reinvest, may wish to consider a limited company. But those with one or two properties may find that it’s more time intensive and costly than expected.

Conclusion:

As you can, the decision to structure your investment portfolio as a limited company versus individual ownership depends on various factors. From tax efficiency and asset protection to estate planning and flexibility, the benefits of a limited company structure can contribute to the long-term success and sustainability of your investments. However before making any decisions, it is really advisable to consult with an accountant to ensure you get what you want out of it. 

If you have any queries on anything lettings just give me a call on 01480 494939