Should buy-to-let landlords set up companies?

Many landlords are considering setting up companies to avoid the tax relief reductions on commercial mortgage interest payments.

Michael Wright from property taxation advisers RITA4Rent, quoted in a Guardian article from December 2016, said that his company had experienced a large increase in landlords asking for advice on forming companies.

Companies have different tax rules to individuals. They are subject to corporation tax, which is 20% and will decrease to 17% by 2020. For higher rate taxpayers on a 40% or 45% tax rate, this could be a saving. Corporation tax has no personal allowance, but mortgage interest, maintenance and administration costs are expenses that can be offset against rental income.

Setting up a company itself is inexpensive, with online services able to do it for less than £100. After that though, according to Wright, transferring existing property to a company is not straightforward. For a start, a 3% stamp duty will be charged. If the property has increased in value there could be capital gains tax to pay. These costs could negate any tax benefits.

Using a company to purchase new property is less difficult. However, if landlords want to take out an income they could be liable to pay tax.

Stuart Law of Assetz Property summed up the situation, saying:

“On paper incorporation looks like a great idea. However, when it comes to the practicalities we’re not sure landlords will do it. The cost of transferring properties means that for many it is simply not worthwhile. For new purchases though, it can be worthwhile.”