In April 2017, the UK government introduced changes to the way landlords needed to pay their taxes. These changes, which are being phased in over a four year period, mean landlords with residential properties will no longer be allowed to deduct allowable costs related to the property, e.g. mortgage interest, though they will benefit from a tax credit of 20% of the cost of this interest.
As a way of avoiding the potentially negative impact of these changes, many landlords now structure themselves as limited companies, which are exempt from the new legislation.
What Does Becoming a Limited Company Mean?
As a limited company, you are no longer renting the property as an individual homeowner but as a business. As a business, you will have running costs and be required to pay corporation tax. You will also need to have named directors with liability assigned and formally file accounts each year. Once your company has been set up, rather than claim all your rent as income, you will need to pay yourself a dividend. You’ll then be taxed on this, which should cut your tax bills significantly.
While becoming a limited company might seem like a good idea, many industry experts believe that there are no real financial benefits unless you own at least four properties. If you do already own those properties, your new company will need to buy them from you, meaning you will need to pay capital gains tax and stamp duty as well as any additional valuation and conveyancing fees.
If you don’t own any buy to let properties and are setting up a limited company before making a purchase, you need to bear in mind that mortgage rates for limited companies are generally higher when compared to those for personal ownership.
Dividends are taxed differently from other forms of income, which might mean the amount you pay in tax does not fall as much as you expected; currently, the tax-free dividend allowance is £2,000.
How to Invest Through a Limited Company
If you want to set up a limited company, you will need to create a Special Purpose Vehicle (SPV) Limited Company. This can be complicated, so it is worth retaining the services of a qualified accountant to help you. To set up an SPV, you will need:
1. A company name, one that doesn’t sound the same as or similar to other companies, use sensitive or offensive words or phrases or suggest it represents a government agency or local authority.
You can search the Companies House Register to find out if the name you are considering for your company is already in use.
2. A physical address in the same country as your company is registered. This can be your own address or that of your accountant (the organisation that manages your corporation tax).
Remember the company address will be published on the Companies House Register.
3. At least one Director who is over 16 years of age and who isn’t disqualified from running a limited company. Their names and addresses will be published on the Companies House Register.
Directors are responsible for ensuring the company operates as outlined in its Articles of Association, maintaining company records, reporting any changes in the company’s structure to Companies House, filing accounts and tax returns and ensuring corporation tax is paid.
4. At least one shareholder who own the company’s capital (which means they also own the company). You can have as many shareholders as you want, and shareholders can be directors.
When taking out a buy to let mortgage within a Limited Company, it is a requirement that the Director is also a majority shareholder.
5. A statement of capital that lists the number and types shares a company has and the total share capital. A statement of capital must also include the names and addresses of all shareholders.
You’ll need to include the share of dividends the shareholders will receive and if their shares can be redeemed for money as well as whether shareholders have a vote on company matters.
6. A memorandum of association, a legal statement signed by all initial stakeholders and saying they intend to form a company.
You can find a memorandum of association template on the UK government’s website.
7. Articles of association which outline the rules directors have to follow to run the company.
Tip: You cannot register your company if you don’t have articles of association, so make sure these are done as soon as possible.
Registering your SPV
Once you have set up your SPV, you will need to register it. You can register your company online if it is limited by shares, uses the governments model articles of association and doesn’t contain any words in its name that require permission to use. If you are setting up a public limited company or one limited by guarantee, or you cannot register online, you will need to use form IN01, which is available on the government’s website. You can also use this form if you would rather not register online.
Registering online is cheaper (at £15 as opposed to £40) and quicker (at 24 hours versus 8 to 10 days) than registering using IN01; if you want your company to be registered on the same day, there is an additional £100 fee.
Registering for corporation tax
Once you are registered at Companies House, HMRC will send you a Unique Taxpayer Reference (UTR) number to your registered address. You need this number to register for corporation tax, and you must register within three months of the date you start trading.
HMRC will require you to provide full details of your company and your directors as well as when you plan on filing your annual accounts; you must stick to these dates or risk a fine.