Sole trader or limited company? The choice facing buy-to-let landlords.
If you're renting out property, you have a number of issues to consider. But don't neglect one of the most important ones, writes accountant KAREN PORTER.
Being a landlord can provide a reliable monthly income, while allowing you to own an asset which should grow in value.
The decision to operate as a limited company or remain a sole trader is probably the most difficult. After recent Budgets, it is even more important to make the right choice for a variety of reasons.
Over recent years, there has been a big rush to incorporate by landlords, as they try to reduce their tax liabilities and lessen the gravity of rising mortgage rates.
Since 2017, landlords have no longer been able to deduct all mortgage interest from their rental income. Today you need to add rental income to your other income and pay income tax on the full amount. You are then allowed a basic-rate tax credit at a maximum 20% of the mortgage interest, meaning the tax paid is based on revenue not profits.
One of the main attractions of a limited company, therefore, is that landlords are still allowed to offset their mortgage interest for tax purposes.
A limited company also reduces personal liability, but also comes with a lot of extra responsibilities as follows:
- Need to register with Companies House – increase bureaucracy/paperwork
- Need to keep accurate up-to-date records
- Preparation and filing of articles of association
- Filing of Companies Act compliant accounts and submission of Corporation Tax returns
- Requirement to report changes (directors, secretaries)
As a director, you are also required to publish your name and address, which some landlords may not be keen to do. Another drawback of a limited company is that mortgage rates can be more expensive than for sole traders.
When selling properties, individuals will have to pay Capital Gains Tax (CGT). The rate of the annual CGT Allowance is steadily being reduced, thereby increasing the tax burden. But a limited company pays Corporation Tax on any profits made, rather than CGT, so more of the earnings are left in the business. Those earnings can then be withdrawn either as a salary or dividends.
The tax rules can be a minefield, as they depend on individual circumstances. Anyone making this decision should therefore seek out professional tax advice.
If you would like to discuss your situation with our landlord accountants, please contact us on 0115 955 5500 or email enquiries@pagekirk.co.uk.
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