Should I set up a Limited Company for Rental Properties?
The decision to operate a rental property business through a limited company structure has become more common among landlords.
This shift has been driven in part by changes in how HMRC taxes rental income, prompting many landlords to reevaluate their approach.
The decision for a landlord to establish a limited company for tax purposes is a significant one that requires careful consideration.
While the potential tax savings and liability protection a limited company can bring may be attractive, landlords must also factor in the additional administrative burdens, buy to let mortgage implications and double taxation risks.
Ultimately the suitability of a limited company structure will depend on each landlord’s circumstances, including the size of their portfolio, income level and long term investment goals.
In our limited company landlord guide we highlight some of the potential advantages and drawbacks of using a limited company for your property rental business.
Limited company landlord potential benefits
Using a limited company structure can offer several potential benefits for landlords with the most popular often being the opportunity of paying less tax on your rental income.
- Reduction in tax paid on rental income
When a property is owned by a limited company, the landlord, now acting as a director, is not subject to income tax on the rental profits.
Two of the main taxes that a landlord operating their rental property business via a limited company must be familiar with are corporation tax and dividend tax.
Some residential landlords can achieve substantial tax savings because corporation tax rates and dividend tax rates are typically lower than the higher income tax brackets.
Limited company landlord corporation tax:
A limited company is liable for corporation tax, which is currently set at a flat rate of 19% for profits up to £50,000.
The corporation tax rate increases up to a maximum of 25% for profits over £50,000.
Limited company landlord dividend income:
Rental income profits can be taken from the limited company as dividends which are taxed after you have used up your tax free dividend allowance which is worth £500 per tax year.
The dividend rates of tax are based on the tax band your income falls into from other income.
- Basic 20% rate of tax: 8.75% dividend tax rate.
- Higher 40% rate of tax: 33.75% dividend tax rate.
- Additional 45% rate of tax: 39.35% dividend tax rate.
Using profits from rental income for reinvesting:
Landlords can benefit from various tax-planning strategies, such as retaining profits within the company which could be used for reinvesting in another property.
If you plan to expand your property portfolio by purchasing additional properties, reinvesting your profits from rental income into further property acquisitions might be a consideration.
Individual landlords are subject to income tax on their total profits, meaning reinvestments occur after income tax is paid to HMRC.
A company structure allows profits to remain within the company and be used for reinvestment before corportation tax is payable, thereby enhancing tax efficiency.
- Limited liability protection
Operating through a limited company can provide a landlord an added layer of protection, as the company is considered a separate legal entity from its owners (the directors).
This limited company structure effectively separates the business’s finances from the individual’s personal assets, offering a landlord a degree of protection in the event of financial difficulties or legal disputes with a tenant for example.
- Increased flexibility with rental income profits
Within a limited company structure, landlords can enjoy greater flexibility in managing and distributing their rental profits.
Profits from rental income can be reinvested to expand the property portfolio, contribute to pension funds, or used to reduce outstanding debts before being subject to personal taxation through dividend payments.
- Simplified ownership transfer and inheritance planning
Transferring ownership of a property portfolio held within a limited company is generally more straightforward than transferring individually owned properties.
This can facilitate smoother transitions, whether for inheritance purposes or when restructuring the business.
Additionally, there may be opportunities to mitigate stamp duty, inheritance tax, and capital gains tax liabilities through careful planning within the company structure.
- Landlord mortgage interest tax relief
A limited company remains unaffected by the challenges related to mortgage interest relief, allowing all mortgage interest and associated expenses to be deductible from the rental income of the property business.
One of the main factors for landlords considering a limited company formation can be traced back to the introduction of Section 24 in 2015.
Coming into full effect in 2020 the amendment significantly altered the way landlords are taxed on their rental income.
Prior to Section 24, private landlords could deduct mortgage interest and associated finance costs from their rental income, effectively reducing their taxable profits.
However, under the newer rules, landlords are now taxed on the entirety of their rental income, with mortgage interest relief replaced by a 20% tax credit.
Because of this some landlords (higher rate taxpayers especially) found themselves facing a substantial increase in their rental income tax bill, prompting them to consider a limited company to help mitigate the financial impact.
Limited company landlord potential drawbacks
While the benefits of operating as a limited company can be substantial, it is crucial to weigh these advantages against the potential drawbacks and additional responsibilities that come with this business structure.
- Initial limited company setup and ongoing costs
Establishing a limited company involves initial setup costs, such as registration fees and legal expenses.
There are ongoing costs associated with maintaining the company, including accounting services, annual filing requirements with companies house, and potential penalties for non-compliance.
- Transferring existing rental properties
If a landlord already owns properties in their personal name, transferring these assets to a limited company can trigger significant tax liabilities, such as stamp duty and capital gains tax.
This process can be complex and costly, potentially offsetting some of the anticipated tax savings.
- Buy to Let mortgage availability and costs
Obtaining buy-to-let mortgages through a limited company can be more challenging, as fewer lenders offer these products.
Limited company mortgages often come with higher interest rates and stricter lending criteria, potentially increasing the overall cost of borrowing.
- Increased administrative burden
Operating a limited company requires adhering to stricter reporting and compliance requirements.
This includes maintaining detailed financial records, filing annual accounts with companies house, and complying with various regulations and legal obligations.
Failure to meet these responsibilities can result in penalties or legal consequences.
- Personal tax considerations on rental income
While limited companies are subject to corporation tax on their profits, any income withdrawn from the company (whether through salaries or dividends) may be subject to additional personal taxation when you complete your own individual self assessment tax return.
HMRC will expect you to declare the taxable income taken from the company along with any other income received outside of the limited company,
This double taxation aspect should be carefully considered and appropriately planned for.
- Capital gains tax allowance limitations
When selling a property owned by a limited company, there is no capital gains tax-free allowance available, as there is for individuals. This means that the entire gain realised from the property sale may be subject capital gains tax.
Limited company guidance for landlords
Given the complexities involved in establishing and operating a limited company for rental properties, it’s worth seeking professional advice from a qualified accountant, tax advisor, and a legal expert if necessary.
These professionals can provide tailored landlord tax guidance based on your own individual circumstances, ensuring that all potential implications are thoroughly evaluated and appropriate tax strategies are implemented from the beginning.
Your landlord accountant can also help you select the best company type for your property business and set up your limited company with companies house.
Making tax digital for landlords is also an important consideration that your accountant can help with. HMRC is expecting individual landlords to comply with their MTD legislation from April 2026 or April 2027 depending on your level of rental income.
