Landlords have been debating the question, “Should I incorporate” for years now. Back in 2017, the government began the phased introduction of restricting tax relief for residential property finance costs if you have earnings above the Basic Rate Tax Band (i.e. >£50,000). Before 2017 the single biggest tax allowable expense for most landlords was the interest on their mortgages. For reasons known only to HMRC, a loophole was left within this policy change which meant that limited companies can still claim this tax relief.
Therefore common wisdom in the Buy-To-Let industry became trying to shift properties into limited companies. This resulted in a few quite contentious schemes such as the now infamous Less Tax For Landlords plan, which involved a quite artificial attempt to qualify for inheritance tax relief, and other manoeuvres like forming a partnership which later incorporates into a limited company to get around stamp duty.
The key question these things miss is the most basic one of all:
Is it actually worth it to incorporate?
Since the initial change back in 2017, the government have increased the Corporation Tax rate to 25% and increased the Dividend Tax rate. In the last year in particular, the interest rate on borrowing has now jumped significantly. These changes require a bit of complex analysis to get to the bottom of. Analysis which thankfully has recently been carried out by Tax Insider, a major UK tax publication.
Below, Lee Sharpe compares three different examples. The finances of incorporation under the old 2015/16 rules before finance was restricted, property held in your own name with little to no interest and property held with extremely high interest costs equal to 50% of profit.
As expected, the incentive to incorporate didn’t exist under the old rules where companies and individuals were treated equally, even at high earning levels.
Under the current rules, the only incentives for incorporating are where your finance costs are extremely high and you simultaneously earn >£45,000 of taxable income in the year. At this point the savings start to swing in your favour and it grows substantially beyond that point. For Landlords in this area, incorporation starts to actually become an attractive proposition (Or at least a less-bad option). For everyone else, it represents a waste of time and effort.
Reservations & Conclusion
The big asterix beside this analysis is that even for Landlords who currently meet the conditions for this structure – interest rates are currently highly volatile and the government aim to reduce these. If properties are shifted into a company then they may become stuck there in the long term due to the Stamp Duty and Capital Gain costs of trying to move the properties out.
In addition to changes in the interest rate, it’s not impossible in the near future that the government will alter the rules on mortgage interest and apply the same restriction to limited companies that they do to owner landlords – the current rules are extremely artificial and the advantages gained are entirely because of inconsistent government rules. It may be short sighted to assume these will continue in the long term.
There are also the practical implications of buying properties via a limited company – in our experience banks can be reluctant to work with landlords who don’t fit into their easy models. They would rather have a mortgage in your own name for administrative reasons and also to give them the legal right to pursue debts against you personally if the mortgage is defaulted on.
