Incorporation – making a sole trader or partnership business into a limited company – is becoming increasingly popular among landlords, with 47,400 people setting up buy-to-let limited companies in 2021, up from 41,000 in 2020. 

Going from running a business in your own name to becoming the owner of a company comes with a range of advantages. Landlords who don’t realise this in 2023 are more likely to struggle than their competitors. 

With that in mind, here’s why you should think about incorporating your buy-to-let business in 2023.


Tax advantages

Running a business as a limited liability company first comes with significant tax advantages, because rather than paying income tax on profit as independent landlords do, buy-to-let companies pay corporation tax. 

You’ll probably be aware that corporation tax will be increasing from 19% to 25% from April 2023 – but did you know that this only applies to companies with profits above £250,000? 

Companies with profits of £50,000 or less will continue paying 19%, while companies making between £50,000 and £250,000 with pay tax at 25% reduced by a marginal relief. 

Meanwhile, from April 2023, income tax will be levied at:

  • 0% on first £12,570 earned
  • 20% on the portion of profits between £12,571 to £50,270
  • 40% on the portion of profits between £50,271 to £125,140
  • 45% on the portion of profits over £125,140.

As you can see, companies – especially larger ones – could stand to gain from better tax treatment than individual landlords.


Tax relief for incorporated landlords

Not too long ago, self-employed and incorporated landlords could benefit from a very generous tax relief, until it was phased out from 2017. 

Before the change, landlords could claim tax relief worth 40% or 45% of the interest payments on their buy-to-let mortgages. Now, they can only claim a 20% tax credit – however, that change only applies to private landlords. 

Meanwhile, landlords who rent through a limited company can continue to benefit in full from the old tax relief system to become even more tax efficient than their self-employed competitors. 


Limited liability protection

Corporations benefit from limited liability, which means their finances as a business are entirely separate from the personal finances. 

In practice, that means if a landlord’s company went bankrupt, limited liability would kick in and limit the amount of money an incorporated landlord would have to pay to what they personally invested into the business. 

On the other hand, a self-employed landlord has unlimited liability, which means they would be responsible for all debts, which is why bigger portfolios with bigger risk can bebetter off being incorporated. 


Some things to consider before incorporation

Incorporating your buy-to-let business is no small decision, as there are a few downsides that you need to consider – at the very least to plan for. 

For example, if an incorporated landlord takes out a regular salary from their company, the money will get hit by an income tax deduction. 

However, if they’ve taken the time to learn how to extract company profits with a mix of salary and dividends, incorporated landlords can improve their tax-home pay compared to self-employed landlords.

Then there’s the fact that mortgages for companies tend to be more expensive, and the extra administration that comes with running a company

Furthermore, when you set up a company, you technically have to ‘sell’ your property to the company, which opens up the possibility of having to pay capital gains if your property has increased in value by a certain amount since you first purchased it.

Nevertheless, with smart tax planning, intelligent business advice and outsourced accounting, you can reduce the pain of the disadvantages and grow the benefits of the positives. 

Reach out to discuss whether you should incorporate your buy-to-let business.