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Limited company landlord numbers on the rise despite barriers

Are you a prospective or existing property investor wondering whether to use a limited company structure? The latest research shows you’re certainly not alone.

Another piece of research has been published backing up the growing trend for buy-to-let landlords to purchase and operate their rental properties as a limited company, rather than as an individual. This time, Paragon Bank’s analysis has revealed that it continues to be a popular option for a growing number of people.

While only around a quarter of the landlords surveyed currently own all their investment properties in such a structure, and a slightly greater number – 34% – own all their properties under their own name, a third of this latter group intend to switch to a limited company in the next three years, says Paragon.

However, around the same amount again expressed that they would not transfer their properties, and would continue to operate as an individual rather than a company, demonstrating that it is not something that will suit all landlords.

The main difference between operating as an individual versus as a limited company is linked to the way the entities are taxed, and tax changes over the past few years in the buy-to-let space are prompting much of this shift towards what many describe as the “professionalisation” of the industry.

Portfolio landlords could get more benefits

Portfolio landlords with several investment properties seem the most likely candidates for operating through a more professional structure – and they are also more likely to reap greater rewards from operating in such a way.

This is because some of the main advantages of owning properties through a limited company are linked to how the income is taxed. If you own a property as an individual, you pay income tax, which could be more likely to tip into the higher tax bracket if you own numerous properties.

However, for those whose portfolios are owned within a limited company, you pay corporation tax, which was 19% for the financial year beginning April 2022. This compares with 20% income tax for basic taxpayers, 40% for higher rate and 45% additional rate for top earners.

Paying corporation tax instead of income tax on your earnings can therefore be a big saving on your tax bill, although it is important to note that you may also need to pay income tax on any dividends you draw down.

But another big advantage is linked to the phasing out of mortgage interest relief for landlords from 2017. Landlords can now claim a 20% tax credit on their mortgage interest payments, but the relief can still be claimed for limited company landlords, which can lower your tax bill further.

Transferring property can be problematic

As Paragon’s research highlights, there are barriers and downsides to limited companies that mean it is certainly not the best option for every landlord.

For example, more than half of those that said they did not intend to switch to such a structure said that tax was the main barrier. This is likely linked to the possibility of double stamp duty taxation: if you already own a property in your own name, you would essentially be selling it to the limited company, triggering a stamp duty bill.

Meanwhile, 36% said there was a lack of information available on how to incorporate, and just over a quarter (26%) noted that there were fewer mortgage options available. While lenders are responding to the growing demand for limited company mortgages, these products can often be more expensive.

Commenting on the findings, Paragon Bank’s managing director of mortgages, Richard Rowntree, said: “There has been a significant increase in the number of landlords who hold property in a limited company structure over the past six years as the government started to phase out mortgage interest relief from 2017.

“Many landlords who own property exclusively within a limited company structure have done so from the off and that is reflected in the demographic of this group, which is typically younger than those with personal name or mixed portfolios.”

He added: “There is a clear desire for a large proportion of landlords with property in personal names to incorporate, but barriers persist, such as having to pay stamp duty and capital gains tax.

“We would advise landlords in this position to speak to a tax specialist who can offer guidance on the most suitable route available.”

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