Ask the expert: Is it time to move your portfolio to a limited company?

Why move a property portfolio to a limited company?

Changes to mortgage interest tax relief are gradually being phased in. Come April 2020, landlords will not be able to deduct any of their mortgage expenses from rental income to reduce their tax bill.

Instead, they will receive a tax-credit, based on 20 per cent of their mortgage interest payments. This is less generous for higher-rate taxpayers, who effectively received 40 per cent tax relief on mortgage payments under the old rules.

These tax changes have prompted landlords to consider incorporating a limited company structure for their portfolios to reduce their costs. The research we conducted last year, in conjunction with BDRC Commercial (now BVA BDRC), found that one in five had recently set up a limited company.

What are the tax benefits of setting up a limited company?

Put simply, limited companies pay corporation tax, not income tax. Landlords who have moved their portfolio to a limited company will be paying corporation tax at 19 per cent, which is due to fall to 17 per cent in 2020.

However, private landlords have to pay income tax so this will be 20 per cent for basic-rate tax payers and 40 per cent for higher rate tax players.

The reason limited companies are treated differently to individual landlords is that companies are taxed on their profits, while private landlords are taxed on their income.

What are the other benefits?

Firstly, limited company landlords can access larger loans. The changes to underwriting criteria for landlords had a big effect on affordability calculations. Lenders do vary but they typically request rent to cover up to 145 per cent of the interest payment for private landlords.

The Prudential Regulation Authority’s (PRA) changes did not affect limited companies; typical rental cover has remained at 125 per cent. This means limited company landlords would be able to borrow more against the same property, should they wish to maximise their leverage.

Through a limited company, owners can receive dividends at a lower rate of tax. The first £2,000 of company dividends each year is tax free. Thereafter, beyond the personal allowance, dividends are taxed at 7.5 per cent until income crosses the threshold for higher rate tax payers. After this, the rate rises to 32.5 per cent, and 38.1 per cent for additional rate taxpayers.

Finally, since limited company profits are not exposed to income tax while retained within the business, the structure allows for more capital to be used to build portfolios or refurbish existing properties.

What should brokers tell landlords about operating as a limited company?

Above all, landlords should seek independent tax advice to check a limited company is the right option for their portfolio. It isn’t the role of brokers to give professional tax advice – leave that to the experts.

What brokers need to be aware of is the right product for their client from the plethora of limited company products currently available and which shouldn’t require their client having to pay a premium to access.