Incorporate a property business in the UK
Suppose you are a landlord with multiple properties paying a higher rate or additional rate tax on your rental income. In that case, you may consider incorporating your business to reduce costs and professionalise your buy-to-let portfolio business.
Advantages of incorporating your property business
Interest tax relief
Incorporating your property business means that you can offset your mortgage interest against your profits, meaning that the corporation tax you will pay on your profits will be lower. In contrast, if you are an individual landlord, you can no longer claim mortgage interest payments against your rental income. Instead, you receive a 20% tax break on your mortgage interest payment.
Low corporation tax
If you set up a company, you will pay corporation tax instead of income tax. Corporation tax is currently at 19%, and given the government's growth plan for the UK, this is likely to remain low to grow and maintain the competitiveness of the UK economy. Individual landlords will be liable to pay income tax at 40% and 45% for higher rates and additional rates for taxpayers on any rental income derived from properties. Paying a 19% corporation tax on your profits may seem a better alternative, especially if you have multiple properties.
Taking dividends from your business is tax-free for the first £2,000 per annum. If you want to take dividends above £2,000 tax-free allowance, you will have to pay 8.75%, 33.75%, and 39.35% if you are a basic rate, higher rate and additional rate taxpayer, respectively.
Furthermore, contributing to your pension via a limited company is more tax efficient than if you were an individual as you lower your taxable profit and therefore pay less corporation tax.
No capital gains tax
Limited companies are not required to pay capital gains tax on any assets sold. As an individual selling your property, you are subject to paying capital gains tax on profits made from the sale of your property.
Limitations of incorporating your property business
Transferring property individually to a company
If you are an existing landlord who wishes to set up a limited company for your buy-to-let property business, you must transfer current properties to a company. It is best to seek specialist advice as moving a property means selling it to your company, which can trigger capital gains tax, stamp duty and other fees that can be costly if the relevant allowances are not utilised.
If you purchase a property as a company, you will need to take out a commercial mortgage. Lenders see commercial mortgages as higher risk, so the interest charged may be higher than an individual mortgage.
What to consider?
While setting up a limited company may save you the income tax, it can also lead to more admin and paperwork. Furthermore, if you already have properties, transferring these to a company may prove costly. Overall, you will need to look at your current portfolio and consider your plan for the future expansion of your property business to assess if incorporating your property company.
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How to incorporate your Buy To Let company
The first hurdle any business founder will likely face is incorporating their business into a UK company so the business can operate as a separate legal entity.
A person might want to incorporate their Buy to Let (BTL) business at Companies House to act as a business under the Companies Act 2006. When incorporating a new company, the BTL company undertakes certain obligations of notification and filing.
Buy To Let company set up process
Company formation can be overwhelming for business owners looking to incorporate their services into a business. Company law is complex, and the legal requirements required for company registration can be overwhelming. This guide outlines what you will need to take into account and the processes required to complete when you decide to incorporate a company in the United Kingdom so your BTL company can operate.
- Company Type
Work out what type of company you are going to incorporate your BTL company as. In the UK, private companies limited by shares are the most popular so you might want to start by thinking whether this company type suits your business.
- Choose a Company Name
One of the first things you will likely do when deciding whether to start your BTL company is to brainstorm names for your business. You need to ensure that your company name is unique and does not contain sensitive words.
Read more about the requirements for choosing a name for your BTL company.
- Choose your company’s registered offices
You will also need to choose an official address for your company- its ‘registered office’- so that departments like HMRC can deliver important information like legal notices, reminders and statutory updates. The address must be located in the same country that you are incorporating your BTL company, but it does not have to be where your company carries out its business activity. For example, if you incorporate your BTL company in England, your office address must be in England but it doesn’t necessarily have to be the location in which you actually work for your clients. You will also want to select a service address so that you can receive communication from other parties. This address will be made visible to the public on the public registrar.
Learn more about how to choose your company office.
- Members and Persons with Significant Control
If you incorporate a private company for your BTL business, you must appoint at least one director. You will also need to provide the director’s addresses as part of your application. You also need to identify all persons that will be Persons with Significant Control (PSC) of your BTL company and disclose these as part of your application.
- Memorandum and Articles of Association
When you incorporate your BTL company, you will need to make your intention to set up a company clear via a Memorandum. You will also need to create a rulebook for your company that determines how decisions are made. This rule book is called the Articles of Association. There are Model Articles of Association that you can adopt in their entirety.
Learn more about articles of association.
- Share Structures
If the ownership of your BTL company involves share capital, you need to determine the number of shares you will issue and ascribe them to a nominal value. You will need to produce a statement of capital and initial shareholders.
- SIC Code
When you make an application, you will need to provide Companies house with a standard industrial classification (SIC) code. This outlines the intended business activities of your company.
Learn about what SIC codes you might consider picking for your BTL company.
- Submit your application
After you have decided on the above information, you will need to complete a form IN01 that outlines the information related to your BTL company. You can submit an application by paper, using web services or electronic filing software.
Learn more about how to submit your application.
- Onboard staff and clients
Once you have finalised the incorporation process, you will need to generate legal contracts to structure your business activities. Creating lawyer-approved agreements can be costly, and it can be tempting to download free templates online such as for your assured shorthold tenancy agreements . However, this process is risky and unnecessary thanks to contract management platforms like Legislate. Legislate allows users to tailor the essential agreements and provides a full suite of contracts you will need for your BTL company, including tenancy agreements, letters and notices.
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