Should I incorporate my buy-to-let?

by | Feb 18, 2022 | Mortgages

Buy-to-let landlords have faced a raft of challenges over the past few years, from the removal of mortgage interest relief to the introduction of a stamp duty surcharge. 


With the coronavirus pandemic casting more uncertainty than ever on a somewhat volatile market, lots of buy-to-let landlords are looking at the different options that are available to them to keep their property ventures as efficient and profitable as possible. 


One question clients ask us frequently at Mayflower is: should I incorporate my buy-to-let business? 


While there is no one-size-fits-all answer, and much will depend on your individual circumstances as an investor, we’ve outlined the typical pros and cons of incorporating your buy-to-let business below.


What does it mean to ‘be incorporated’?


First and foremost, it is important to understand exactly what it means to be incorporated. 


The UK Government defines incorporation as the ‘process by which a new or existing business registers as a limited company.’ The company then constitutes its own legal entity, separate from its owner(s). 


Most companies are limited liability companies, which means that the owners’ personal financial risk is limited if the business fails or is sued, for example.


The pros of incorporating your buy-to-let


There are several benefits to incorporating your buy-to-let business, depending on your circumstances. 


For lots of professional landlords, the idea of separating themselves from their company in terms of the financial risk (or liability) that they face if something goes wrong makes incorporating an attractive option. 


But incorporating a business also offers other advantages, aside from personal security. You won’t have to pay national insurance on your profits, for one thing, and certain qualifying expenses will be tax-deductible – including your mortgage interest, which is classed as an expense for tax purposes. For unincorporated landlords, mortgage interest relief is restricted to a basic-rate tax credit.


Any profits you make will also be treated differently. Private landlords will have any profits taxed via income tax along with their other earnings, but as the owner of a limited company, your profits will be taxed at the corporation tax rate of 19%. 


You can then take money out of your company to pay yourself, in the form of salary, dividends or pension payments, each of which are taxed differently.


That means that, if you’re a higher rate tax-payer, paying up to 45% on earnings over £150,000, you could stand to make huge savings. 


The cons of incorporating your buy-to-let


While there are lots of potential advantages to incorporating your buy-to-let, it is important to be aware of the possible downsides, too, so that you can feel reassured that you’re making the best decision for your business. 


Firstly, incorporating your buy-to-let adds an extra layer of administration, compliance and complexity to your business – and that comes with a cost, including set up and legal fees.


If you’re transferring property from your own name into a company, you will also need to pay stamp duty, and possibly capital gains tax, on the transfer.


Another consideration is how you intend to finance your property investment. 


Before making the decision to incorporate your buy-to-let, you should spend a significant amount of time carrying out research into what sort of borrowing options are available to you. It is worth noting that some lenders will not lend to companies, preferring instead to deal with private investors only. 


For those lenders that do offer mortgages for companies, mortgage interest rates for company buy-to-let mortgages can also come at a premium. 


They can also include arrangement fees that can be expensive in themselves, depending on how they are weighted. You might find some lenders offer a fixed arrangement fee, while others calculate it based on the value of your portfolio. 


How do my individual circumstances affect my decision?


Working out whether or not to incorporate your buy-to-let business can be a complex process, and it is always best to speak to a professional to make sure you’ve received the best advice. 


Some factors to consider are:


  • What is your current tax position? Whether you are a basic or higher rate taxpayer will determine how beneficial your tax savings are likely to be. 


  • Is the property mortgaged? If not, the benefits of a company structure may not be worth the administrative efforts involved.


  • What is the property’s current value? This will impact the amount you have to pay for any transfer into or out of a limited company.


  • What are your plans for the future? If you wish to use the property as a residence down the line, for example, there will be additional complexities. 


Looking for some more advice?

It can be difficult to know the best way to go about managing your buy-to-let portfolio, but you do not have to do it on your own. 


Please get in touch if you would like some further advice and support. 

Ready to start the journey?

To get help with your accounts and start freeing up your time to focus on growth, talk to the Mayflower team today.

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