Why Are Landlords Forming Limited Companies for Their Rentals?
23 July 2024
Why Are Landlords Forming Limited Companies for Their Rentals?
Why Are Landlords Setting Up Limited Companies for Their Rentals?
Since 2017, the number of landlords forming limited companies for their properties has surged, with 300,000 registered in 2022 alone. Today, approximately 40% of new buy-to-let purchases are made through a company structure.
This shift stems from the 2015 tax reform known as Section 24, which altered how landlords are taxed on rental income. Previously, landlords could deduct mortgage interest and other costs before taxation, but Section 24 now requires landlords to pay tax on their total rental income, with mortgage interest relief capped at the basic income tax rate of 20%.
In this blog, we’ll explore why landlords are transitioning to limited companies and weigh the advantages and drawbacks of this approach.
What Is Section 24 and How Does It Affect Landlords?
Implemented fully in 2020, Section 24 changed the tax relief landscape for landlords. Under the new rules, landlords are taxed on their full rental income, with mortgage interest relief capped at the basic income tax rate of 20%. This change has driven many landlords to set up limited companies to manage their tax liabilities. However, it's important to consider whether this move is beneficial for your situation.
Benefits of Setting Up a Limited Company
- Reduced Tax Bill
- Limited companies are taxed at the corporation tax rate of 25%, which can be lower than the personal income tax rates for higher earners. This can result in significant tax savings.
Limited Liability
A limited company structure separates personal and business finances, protecting personal assets from business liabilities.
Increased Flexibility with Profits
Profits in a limited company can be reinvested, used to pay down debt, or distributed as dividends, offering more flexibility in managing income and investments.
Easier Ownership Transfers and Inheritance Tax Benefits
Transferring ownership and managing inheritance tax is simpler within a company structure, potentially reducing stamp duty and capital gains tax liabilities.
Potential Drawbacks of a Limited Company Structure
Not Ideal for Lower Rate Taxpayers
For landlords in the basic income tax bracket or with only a single property, the benefits of a limited company may not outweigh the costs.
Transfer Costs
Existing properties must be sold to the company, incurring stamp duty and other costs, which may lead some landlords to retain personal ownership of their existing properties.
Increased Administrative Responsibilities
Running a limited company involves more paperwork and compliance, including company tax returns and detailed financial records. This may require hiring an accountant, incurring additional costs.
Double Taxation Concerns
While a company pays corporation tax on profits, any salary or dividends taken by directors are subject to personal income tax.
Limited Capital Gains Tax Allowance
There is no tax-free allowance for capital gains when selling properties through a company, though the lower tax rate and other efficiencies may compensate for this.
Higher Mortgage Costs
Mortgages for limited companies may come with higher fees and interest rates, and fewer products may be available compared to personal buy-to-let mortgages.
Complex Equity Release
Releasing equity from a property is more complicated in a limited company structure, as funds withdrawn must be declared as income and are subject to tax.
How Should You Proceed?
Deciding to form a limited company involves several factors and should be tailored to your specific financial situation. For landlords in higher income tax brackets, consulting with a financial advisor can be beneficial to determine if this structure is advantageous.
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Managing a property portfolio comes with great potential for high returns, but it also brings challenges such as maintenance coordination, tenant management, and financial planning. Portfolio landlords must adopt a strategic approach to ensure their investments are profitable, compliant, and stress-free. This guide explores the key principles of property portfolio management, offering insights on how to maximise rental income, streamline operations, and minimise risks. What is Property Portfolio Management? Property portfolio management refers to the strategic oversight of multiple investment properties. Unlike single-property landlords, portfolio landlords must balance different financial, operational, and regulatory considerations across multiple assets. A well-managed portfolio leads to: Consistent rental income and occupancy rates. Reduced maintenance costs through proactive planning. Legal compliance across all properties. Efficient handling of tenant relations. Key Strategies for Successful Property Portfolio Management 1. Establish a Clear Investment Strategy Before expanding a portfolio, landlords should define their investment goals: Buy-to-let income vs. capital growth – Do you prioritise monthly yield or long-term appreciation? Geographical focus – Concentrate on high-demand areas like Manchester and the Northwest. Property type – Focus on HMOs, single-lets, blocks, or a blend? Having a clear strategy helps landlords make informed purchasing and management decisions. 2. Professional Property Management: When to Delegate Self-managing a large portfolio can be overwhelming. Partnering with a property management company like Northmode Properties allows landlords to: Handle tenant communication, rent collection, and compliance. Reduce void periods with efficient tenant transitions. Access vetted contractors for cost-effective maintenance. A professional team can free up your time while ensuring high occupancy and compliance. 3. Financial Planning and Cash Flow Management Strong financial management is vital. Keep close watch on: Rental Yield & ROI – Make sure income exceeds expenses. Service Charges & Maintenance Budgets – Anticipate ongoing and long-term costs. Refinancing Options – Use equity to fund further growth. Tax Planning – Consider limited company structures to optimise tax. 4. Compliance and Risk Management Managing multiple properties means managing multiple legal obligations. Ensure: EPC and energy efficiency compliance Fire safety and gas certificates Deposit protection schemes HMO licensing (if applicable) Staying compliant protects against penalties, disputes, and reputational harm. 5. Scaling the Portfolio: Growth Strategies Looking to grow? Consider: Targeting high-yield areas and off-market opportunities Using remortgaging to release capital Forming joint ventures for larger deals Diversifying with HMOs, student lets, or mixed-use buildings Why Work with Northmode Properties At Northmode Properties, we specialise in helping portfolio landlords manage, grow, and protect their investments. We offer: Block and property management under one roof Lettings and tenant support tailored for portfolio landlords Maintenance coordination across multiple units Transparent financial reporting and strategic insights Ready to Take Your Portfolio to the Next Level? If you’re a portfolio landlord in Manchester or the Northwest, Northmode Properties is here to help you scale efficiently and sustainably. Contact us today to learn how we can support your growth and streamline your operations.