Being a landlord, whether that’s your chosen profession or your side hustle, is becoming an increasingly complex area of tax legislation. That’s why so many landlords have turned to the help of Pete Edwards – Chartered Accountant & Landlord – for his professional assistance. In this blog Pete will give us some great tips for how landlords can move forward into 2022.
Pete, so many landlords have chosen to incorporate over the last few years. At what point should a landlord set up a limited company and why?
There are quite a few factors at play when making this decision, and there is no one-size-fits-all answer to this question. I’ll highlight some of the key factors that landlords need to consider, but at the end of the day the best way to make your decision is to speak with an experienced landlord accountant who can assess your overall tax picture and advise the best route for you. We offer a free no-obligation consultation, and you can speak to me in person – just book your consultation here.
So to begin with, you need to consider your own tax rates; if your salary and investments exceed £50,000 per tax year then setting up a limited company might be the way to go.
If you’re married that can have an impact too, believe it or not. If you’re a higher rate taxpayer and your partner isn’t, then a deed of variation might be relevant. This is a legal agreement that when buying property as tenants in common allows you to vary the interest in the property which could be weighted higher in your partner’s name. Perhaps even a 99%/1% split. Note this cannot be changed easily once agreed and a Form 13 must be filed before renting the property with HMRC to reflect the variation on rental profits.
How long you plan to own your rental properties will also contribute to your decision. Setting up a limited company should be seen as a long-term investment due to set up costs. And if you do plan to sell in the short to medium term, as an individual you are entitled to an annual capital gains tax allowance which will substantially reduce the tax you pay on any capital gains arising on the property. So, in this case a limited company might not work out the best overall.
Your mortgage amount and product will also factor in, mortgage rates are substantially higher for a limited company than for an individual. In addition, extra costs will be incurred for independent legal advice surrounding personal guarantees that will be required for mortgages to a limited company.
Then everyone’s favourite; accountancy! With Making Tax Digital for landlords on the horizon the cost of accountancy compliance needs to be considered, for a company holding one property the accountancy fees may be £500 higher held in a limited company than held in your personal name.
However, if you have many properties then using an accountant will almost certainly work in your favour, and if you are considering building a portfolio of investment property with mortgages and you are a higher rate taxpayer then a limited company would be the right vehicle for you. The deduction of interest as an expense against rental income would be restricted as an individual, this is not the case with a company.
For some people, the purchase of a property portfolio is a vehicle to structure family wealth to pass on to the next generation. Everyone’s circumstances vary however, if purchasing a property investment without the need of finance you may wish to structure the loan to buy the property as repayable to the children for IHT purposes, Loan notes are a way to achieve this and to legally pay interest as an income to family members. In this situation purchasing property via a limited company is the most tax efficient structure as the interest payable is tax deductible.
One final factor I’ll mention, which is a hot topic at the moment, is the upcoming Corporation Tax increase. Corporation Tax is set to rise to ‘up to’ 25%, from 19%, making a limited company less attractive – however the rate is on a sliding scale and will vary depending on your annual profits. So, for some the limited company structure has become less attractive, however if you have (or are planning to buy) a large portfolio of property, incorporating usually comes out as the most tax-efficient route.
In short, there are so many factors at play as you can see. So really, speaking with an accountant is essential before deciding to start a limited company for your rental business.
What advice would you give for landlords looking to make this big step up; to build their portfolio, set up the Limited Company, and really turn their landlord activities into a substantial business?
Firstly, I know I’ve said it already, but speak to an accountant as your first port of call. All of the above and more should be discussed ahead of any big decision like this. The next step is to actually build that portfolio – how do you take that step? Essentially you need some savings behind you, but it is possible without having a huge bank balance at your disposal, here are a few ways to raise that essential capital for your next property deposit:
- Family and friends
The easiest way to drum up the next deposit is to ask people you know, you can legitimately draw up a loan agreement and pay them a commercial amount of interest as a return on their investment. Possibly up to 7% which is a lot higher than any bank savings account. - Remortgage your own home
Utilising equity in your own home is a cheap form of borrowing and this lump sum drawdown can be introduced into your property investment company to use for the next deposit or property purchase. - Personal loan / credit cards
Interest rates on loans are the lowest they have ever been. Assuming you have the credit availability then this may be another avenue to assist with injecting funds into your property investment company. - Refinancing existing rental property
Property prices have greatly increased in the last 36 months, any fixed term mortgage expiring now could be used as an opportunity to draw down on the extra equity in the rental property. Note mortgage affordability calculations are often driven by the rental income generated by the property, regular uplifts in rental agreements will ensure you maximize your loan to value lending opportunity. - Utilising cash reserves & selling assets
Assuming you have set enough aside for unexpected repairs and corporation tax liabilities, surplus funds should be building up on a monthly basis from your property company.
Consider selling personal assets such as a motor vehicle to generate lump sum funds to inject into your company. A monthly car lease would be an alternative which may save you on other overheads such as fuel and road tax when converting to an EV.
There are so many hidden costs for landlords, it’s so much more than just covering the mortgage payments. What expenses can landlords legitimately claim from the maintenance of their rental business?
HMRC state that all costs should be wholly and exclusively incurred in the performance of the business for this to be a justified claim, in layman terms, the claim for the expense must be totally for the purpose of letting the property.
Here are my top 10 expenses that every landlord should be claiming – but many forget to do so:
- Inspection visits
A regular inspection of your property is a must. Mileage claims of 45p per mile up to 10,000 miles can be claimed for petrol and diesel cars. - Replacement white goods
The cost of replacing a washing machine and other white goods are an allowable expense - Interest on loans
If the property has been acquired by your limited company and you have advanced funds to the company to acquire the property, then you can charge your company a commercial rate of interest on this loan on an annual or quarterly basis however forms CT61 should be submitted to HMRC. - Financing costs & legal fees
Mortgage interest relief is restricted to higher rate landlords however if the property is purchased via a limited company the full interest is a tax-deductible expense.
Note when remortgaging the arrangement and legal fees are an allowable expense. - Managing agents and accountancy fees
Professional fees, managing agents’ finder’s fee and ongoing monthly management fees, tenancy deposit scheme fees and advertising are all allowable expenses. - Wages & directors’ remuneration
A limited company can operate a payroll scheme and pay a salary for the management of the portfolio of properties.
Individuals owning properties in their own name cannot claim “owners time costs” for repairs or management. - Repairs and replacements
Repairs to property can be claimed as a revenue expense, assuming the replacement item is as close to like for like and not an improvement to the property.
Improvements to the property such as an extension which creates another bedroom would be treated as a capital expense (only taken into account when the property is sold and therefore reduces any capital gain). - Computers and IT costs
The cost of IT equipment is an allowable expense against your rental income. In addition, any cost for accounting software licenses would be an allowable deduction. - Subscriptions
Costs such as professional membership fees such as National Landlord Association are an allowable deduction. - Subsistence
Assuming you have made a long journey to inspect your property or spent many hours on repairs, the cost of drinks and lunch would be justified in a claim.
About the author
Pete Edwards is a director of Warr & Co Chartered Accountants. As an avid property investor, he has over twenty years of experience in all aspects of property taxation and owning and managing a portfolio of residential and commercial property.
Book a call with Pete to discuss your 2022 property plans now.
We provide accounting to landlords so feel free to get in touch.