Landlords turn to incorporation

A hostile tax environment has driven many landlords to register as a company.


Tax relief for landlords is becoming increasingly difficult to get hold of
(Image credit: Dimitri Otis)

Landlords are increasingly choosing to invest in properties through companies rather than as individuals. Nearly half (44%) of buy-to-let mortgage transactions are now made by limited companies, according to data from Mortgages For Business. This is up from 42% in the second quarter of this year.

The simple explanation behind more landlords choosing to incorporate is that they want to pay less tax. Before 6 April 2017, landlords could deduct mortgage interest from rental income before paying income tax. But this tax relief is gradually being phased out, and from 2020 relief for financing costs will be restricted to the basic rate of income tax: 20%. This will affect the profits of higher earners who previously qualified for relief at 40% or 45%. New affordability checks have also made it harder for landlords operating as individuals to borrow as much against a property as they could previously.

A different option

Landlords can avoid the increasingly punitive tax situation by setting themselves up as limited companies, as these benefit from favourable tax treatment of profits. Landlords who pay higher- or additional-rate tax, and who have a mortgage, tend to benefit most from incorporating. If you hold a property in a company, profits are liable for corporation tax at 20% potentially halving your tax bill. Incorporated landlords can also continue to deduct all their costs, including finance, from rental income for tax purposes. Setting up a limited company is straightforward. You'll need to register at Companies House, which can be done online for £12. You'll need a company name, an address, at least one director and details of any shareholders. After you've established your business, you have three months to register it for corporation tax.

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Buying properties as a limited company is also fairly simple. The main caveat is that you'll need to find a mortgage lender that lends to limited companies. You may find interest rates are higher than on mainstream mortgages.

Transferring properties you already own to the limited company is trickier, as effectively you need to sell the property to the company. This means you'll personally be liable for capital-gains tax on any increase in the property's value since you purchased it, while your company must pay stamp duty on the purchase. In some cases, it may be possible to transfer properties subject to their existing mortgages, but if not you'll need to pay off the mortgages and take out new ones in the company name. This process may trigger early repayment charges to redeem an existing mortgage, plus associated fees.

Keep on top of the administration

Running a limited company involves a lot of paperwork. You'll need to file company accounts and tax returns, as well as your own self-assessment tax return. If you hire staff, you'll need to run a pay-as-you-earn salary scheme and workplace pension. You may need to pay an accountant, who can help you with things like drawing income from the company. Any salary drawn (above standard tax allowances) will be subject to income tax plus employee'sand employer's National Insurance. Most company directors take income as a combination of salary and dividends. In general, it's a good idea to take both tax and mortgage advice before incorporating, to check it makes financial sense.

Emma Lunn

Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise. 

She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.