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Should You Incorporate or Form an LLC (limited liability company) as a Landlord?

For many landlords, the opportunity of forming a new corporation has become a reality. If you’re thinking along these lines, is it right for you?

An increasing number of UK landlords are buying property under a company name. There are advantages and disadvantages connected with buying a property through a limited company.

According to recent statistics conducted by BVA BDRC1, by the third quarter of 2018, around 45% of landlords with one to three buy-to-let properties were planning to buy a new property as a limited company. What’s more, approximately 52% of landlords with four or more buy-to-let properties were thinking about transferring their ownership to limited companies.


The reasons why landlords are incorporating


There are many reasons why an increasing number of landlords are choosing to incorporate as a limited company. The main one is to pay lower taxes. Ian Rankin, a property tax expert, explains the tax benefits of buying a property through a limited liability company.

  • A low tax will mean more income which can be used towards future investments and any debt.
  • Tax paid to corporations is around 19% and is forecast to drop to 17% in April 2020. For those earning more than £50,000 where income tax is payable at 40%, the tax advantage is quite clear.
  • IHT – inheritance tax advantages. High inheritance tax bills could affect a family when you die. Incorporating makes it possible to give shares to your family so the value of future growth is not part of their estate.
  • Mortgage interest restrictions affect individuals but not companies.


How to incorporate


Incorporating your rental property portfolio as a limited company isn’t that difficult. There’s plenty of helpful info online as well as how to register with HMRC for corporation tax. You have a three-month window period to do this.

The cost of setting up a limited company can be as little as £12. Needless to say, there are additional costs involved when incorporating and insuring ongoing compliances. These include:-

  • Filing annual accounts
  • Filing corporation tax returns with HMRC

Expect typical costs from anywhere between £500 to £1,000 per annum. If you intend to form a limited company, incorporation checklists are well worth a read. Here are some useful points:-

  1. Are you the sole owner of the property or properties or do you share ownership with at least one other party?
  2. Do you incur operating requirements associated with your rental property business?
  3. Are your businesses total liabilities lower than your properties’ acquisitions costs?
  4. Do consider the pros and cons of refinancing or retaining existing mortgage terms on your property or properties.


Ask the professionals


Digesting all of the information available it certainly looks like forming a new corporation is more tax-efficient for landlords. It’s worth remembering however that not every landlord will benefit from this type of move.

With this in mind, seek the advice of professionals who can explain the pros and cons of buying a property through a limited company. In the end it’s your decision but financial investment mistakes can be costly.