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Ltd or not to Ltd, that is the question?!

Thursday 30 June 2016

By Carl Agar

Never has this question been more pertinent than today and never more does it require serious consideration before a Landlord makes that leap. The honest answer to the question ‘should I incorporate and run my property business in a Ltd company?’ is ‘it depends’, annoying I know!

Following the recent budget announcements that will see the phasing out of mortgage interest rate relief, many Landlords are considering turning to a Ltd company structure in order to minimise the amount of tax they will pay on their property income, but is it the right move?

The answer really is that it depends on your personal circumstances and the plans for your property business. Either way I would always recommend that you have a discussion with an accountant, but let's explore some of the pros and cons of the Ltd company approach a little further.

Historically landlords and investors have used limited companies as investment vehicles, typically the tax paid would be 20% corporation tax on any company profits and often income would be left in the company in order to reinvest in new projects. In this scenario the Ltd company is being used for investment and not as a tax saving tool, although tax advantages are still gained. Ltd companies also give investors the opportunity for more flexibility to buy property with other investors through the use of shares which can be issued and retracted without affecting the property that the company owns. I would also suggest it opens the door a little wider to accessing commercial finance enabling landlords and investors to leverage lending against a portfolio, rather than just individual properties.

Changing may not present you with a saving

On the flip side if you have just one or two properties, you have no intention of growing your portfolio and you are not a high rate tax payer then this move will probably be a waste of time and money. Most people don’t realise but in order to transfer a property from a personal situation to a Ltd company you will effectively need to sell the property to the company, which could attract capital gains tax as well as the new 3% stamp duty surcharge. In such circumstances you will probably find changing to a ltd company will not present you with a saving. It would also be fair to say that standard buy to let mortgages have historically been more difficult to secure for ltd companies but that does seem to be easing.

In conclusion I would suggest that if you are buying property to flip or you are planning on building a property portfolio then the limited company approach could definitely be of benefit to you. If you are a low rate tax payer or you just own one or two properties and your property income does not push you into the high rate tax bracket then I would suggest the Ltd approach is not for you. For those landlords that have existing portfolios in personal names I would suggest your property could be more tax efficient in a limited company but the potential savings are likely to be outweighed by the cost of transferring your properties to a limited company.

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Article by:

Carl Agar

Carl Agar

Carl Agar is the managing Director of Big Red House letting agents, founder and Chief Executive of The Home Safe Scheme, has been the Yorkshire representative of the National Landlords Association for the last decade - the UK’s largest landlord association, as well as being a Landlord and Investor.