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When Does Incorporation Stack Up For Landlords? Part 4

Shared from Tax Insider: When Does Incorporation Stack Up For Landlords? Part 4
By Lee Sharpe, June 2017
In his fourth of a series of articles, Lee Sharpe looks in more detail at the costs of running a buy-to-let portfolio through a limited company.

In the previous article in this series, we looked at how, even when a landlord has to pay the capital gains tax (CGT) that can fall due on incorporation, the incorporation model can potentially pay for itself (stamp duty land tax (or land and buildings transaction tax in Scotland) may also fall due, of course). We used a basic example to demonstrate that the potential reduction in the tax on business profits could offset the CGT payable on incorporation (an amount that could not be postponed) making use of the option to pay by instalments. 

But this was quite a simple illustration, and there are other factors to consider – notably costs that may be peculiar to the company scenario.

Ongoing costs
In the first article, we looked at the mechanism for extracting income from a company: the company has to pay corporation tax on its profits and the shareholder/director may also then have to pay income tax in order to extract the net profits from the company (there may, in some cases, be National Insurance contributions to consider as well). This is an example of the ‘double tax charge’ for owner-managed companies.

However, it can still be more tax-efficient overall to run a buy-to-let (BTL) portfolio through a company, generally where the new tax regime for restricting tax relief on loan interest is set to make ‘staying put’ as an individual BTL investor much more expensive. 

Nevertheless, there are other costs to evaluate when running a company, including:
  • The company’s ‘annual return’ (strictly now a ‘confirmation statement’) that needs to be filed, generally for a nominal fee of £13.
  • The company needs to have a registered office, and some owners prefer for it to be at their accountant’s rather than their home address. Many accountants will happily do this, but will normally charge an additional fee, varying on the size of the company and the volume of additional statutory documentation that they will have to process/forward. Say, nominally £100 – although it could easily be significantly more than that. 
  • A company needs to have its own bank account and these will normally incur bank charges. However, most BTL investors will already be used to running business bank accounts, so there may be no net additional cost in the corporate alternative – although rates of return on net positive balances are notoriously poor for corporate bank accounts.
  • An accountant will normally have more paperwork to deal with when preparing the annual accounts of a limited company as opposed to an unincorporated business – including a company tax return alongside the director/shareholders’ own personal tax returns. For even the smallest of companies, this is likely to cost an additional £250 and potentially more, depending on the scale of the business. 
This cost may increase significantly if the company requires its accounts to be audited, although the company would generally need to break at least two of the following three limits, for an audit to be required:

o Turnover £10.2million
o Gross Assets before offsetting liabilities £5.1million
o Number of employees 50

It may not be uncommon for a BTL company’s gross assets (i.e. before mortgages) to exceed £5.1 million, although exceeding the other two limits is far less likely.
  • The increased paperwork can, in turn, mean more time cost for the company’s owners/directors. This is difficult to quantify and may amount to no more than (say) an hour so a month although, again, the more sizeable and complex the portfolio, the greater the additional time commitment is likely to be.
  • Since director/shareholders are strictly employees of the company, they will generally draw a salary from the company, if only to use their tax-free personal allowances in a way that is also tax-efficient for the company (as deductible salary costs). This is likely to be an additional cost for the BTL business unless it already has employees. A small annual payroll is likely to cost in the region of £150 when delegated to an accountant, payroll bureau, or similar.
  • The new workplace pension obligations will typically not apply to shareholder/director-only companies, although almost certainly will immediately that there is an ‘ordinary’ arm’s length employee.
  • Perhaps the largest potential additional cost is in relation to finance itself. If we assume that the portfolio must be re-financed in order to effect the transfer to a corporate vehicle, then it is quite possible that the corresponding mortgage cost in a corporate portfolio will be more expensive. I have been advised that BTL investors seeking mortgages for portfolios in a company vehicle may be better served speaking directly to their bankers’ corporate finance team, rather than looking for standard mortgage providers that lend also to companies.
It would be realistic, then, to assume that the extra annual costs of running a moderate-sized property portfolio through a company are likely to amount to a good £500 a year – before considering any additional interest costs.

 

Example: Unincorporated vs incorporated

 Brian has a property portfolio that bears £45,000 net income after mortgage interest of £35,000 a year. He has part-time employment income of £15,000, two children for whom he claims child benefit and a ‘Plan 1’ student loan.

Looking at 2020/21, when the loan interest restriction for landlords is fully implemented, Brian reckons that running a company is going to cost an extra £800 a year in terms of administration, plus an extra £3,500 in finance costs annually – in other words, a total extra cost of running the business through a company of £4,300. Note that Brian does not intend to draw a salary from the company because he is already using his personal allowance in his part-time job.

In the following model (which has been ‘cut down’ to show only entries relevant to this example), Brian is a little more than £10,000 better off through incorporating, despite recognising an extra £4,300 in company-specific costs (note that the reduction in student loan repayments comes to around £4,000). This reflects the significant impact of the reduced tax relief for loan interest in substantial portfolios. Brian actually starts off with significantly less income from the company, but his deductions are so much smaller in the scenario, he ends up significantly better off, overall.

 

Conclusion

Clearly, it is important to model the comparison between personal ownership versus corporate vehicle as accurately as possible based on the specific circumstances in each case – and to allow for the potential extra costs that may arise in the company alternative.


In his fourth of a series of articles, Lee Sharpe looks in more detail at the costs of running a buy-to-let portfolio through a limited company.

In the previous article in this series, we looked at how, even when a landlord has to pay the capital gains tax (CGT) that can fall due on incorporation, the incorporation model can potentially pay for itself (stamp duty land tax (or land and buildings transaction tax in Scotland) may also fall due, of course). We used a basic example to demonstrate that the potential reduction in the tax on business profits could offset the CGT payable on incorporation (an amount that could not be postponed) making use of the option to pay by instalments. 

But this was quite a simple illustration, and there are other factors to consider – notably costs that may be peculiar to the company scenario.

Ongoing costs
In the first article, we looked at the
... Shared from Tax Insider: When Does Incorporation Stack Up For Landlords? Part 4