What is the most tax-efficient structure for landlords? | Vesta Property

What is the most tax-efficient structure for landlords?

January 20, 2019

Welcome to the next instalment of our “Landlord Lifecycle” series, where we are documenting the different stages of a landlord’s career.

When starting out in any business, it makes sense to build on solid foundations and that includes structuring your business in a tax efficient manner. This includes mitigating your income tax, but also, in the longer term, inheritance tax.

Tax is never a case of “one size fits all”

It is vital that you seek professional advice

Tax is never a case of “one size fits all”, so, at Vesta, we believe it is vital that you seek professional advice which will be tailored to your personal circumstances.

The tax implications are complicated depending on whether and how you earn any other income, but broadly speaking, landlords have two options for tax structuring:

  1. Buying in their own name
  2. Buying in a limited company wrapper

As with most things, there are pros and cons for both.

Buying in your own name

It is easier to extract income.

For those buying in their own name, mortgage rates tend to be more competitive and it is easier to extract income.  If you have four or less properties, then this is likely to be the best option for you.

According to Private Finance, a landlord with one property earning the UK average rental income of £11,010 per annum on top of a base salary of £35,000 would take home close to £1,400 less each year using a limited company structure.

This landlord would pay a mortgage rate of 3.41% when borrowing through a company, as opposed to 1.92% as an individual. Based on a mortgage of 75% of the property's purchase price, Private Finance estimates the take-home income would be £1,369 less if owned via a business set-up.

Buying in a limited company

Tax bill may be significantly reduced, but it is harder to extract profit

For those buying in a limited company, their tax bill may be significantly reduced, but it is harder to extract profit. 

Companies also have running costs, incur corporation tax and potentially business rates, require accounts to be formally filed and directors to be appointed. Board meetings have to take place and liability is assigned. This creates an added layer of responsibility for landlords choosing the limited company route.

The positive news is that the range of ltd. company BTL mortgages is increasing, making this area more competitive, which is good news for landlords.  In Q2 of 2018, 19 out of the 38 active buy to let lenders were, between them, offering 480 buy to let mortgage products to limited companies. That’s around 31% of all products. Again, we highlight the importance of seeking professional advice from a trusted and specialist advisor.

Schemes and tax structures

Many property experts and commentators believe that Section 24 could be repealed

Due to the advent of Section 24, which is incrementally removing mortgage interest tax relief for landlords, there are many “schemes” and tax structures being advertised to mitigate this. 

Be very wary of such schemes and they have not been tested by HMRC and they may fall foul of HMRC’s wide-ranging tax-evasion protocols. 

The other consideration is that the rules governing buy-to-let are not set in stone and could change again in the future if the Government wishes. Indeed, many property experts and commentators believe that Section 24 could be repealed, as it is deterring landlords from investing at a time when private sector accommodation is vital in helping local authorities honour their housing obligations, due to the lack of social housing available!

Important Note

All information contained in this website is provided as a guideline only, is based on estimates and assumptions, may not be accurate or complete, and is subject to change. We make no representations or warranties with regards to this information, expressed or otherwise. A buyer who relies on such information does so at their own risk. Buyers are advised to seek independent financial advice and should undertake their own due diligence.

Your capital is at risk. Property values may decline and the property might not be able to be rented at amounts sufficient to cover debt interest costs, operating expenses and liabilities, and might not result in a positive cash flow. Property is an illiquid asset and should not be viewed as a short-term investment.

In no event will we be liable for any loss or damage, including without limitation any loss or damage arising directly or indirectly out of or in connection with the use of this website and the information contained therein.

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