The costs of landlords forming limited companies

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Next month, changes to the tax system mean that many landlords will face a reduction in the tax relief on their mortgage interest payments. Some landlords are considering forming limited companies to avoid this extra cost. In a March 2017, a article has looked at the pros and cons of this strategy.

The new tax relief rules restrict mortgage tax relief to 20%. Previously, this was based on the landlord’s tax rate, which could be more than 20%. Many landlords are on a 20% tax rate and will be unaffected by the changes, so forming a company has no advantages for them.

Corporation tax is currently 20%, so higher tax payers will pay less tax. If dividends are withdrawn from the company, these will be subject to tax. Most landlords will pay less tax, but other costs need to be taken into account.

If a landlord sells their properties, then any profit made on the sale will be subject to corporation tax and capital gains tax. This could wipe out any tax savings.

Commercial mortgage interest rates and fees are larger for limited companies. A private landlord can pay 1.59% and a fee of £1,995 for a commercial mortgage, but a limited company will pay 3.29% or more interest with a fee based on around 1.25% of the mortgage loan.

There are also fees for submitting company accounts to Companies House and submitting tax returns of between £500 and £1,000. Landlords need to consider all costs carefully before deciding to form a limited company.

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