Just as an individual pays income tax, a company is liable for corporation tax. This is the case for any company operating in the UK – regardless of whether or not the individual resides abroad.
Far more landlords opting to pay corporation tax
No one particularly likes paying tax, but it’s something that simply has to be done if we want our society to function smoothly. Over the past few years in particular, the number of landlords paying corporation tax rather than income tax has rocketed.
Certainly, many mortgages these days are going under the name of a limited company, and the availability of such mortgage products has increased hugely in response. Landlords will still pay more for a mortgage in the name of a company, but in many cases the amount they save later on still makes going down this road worthwhile.
The main reason for landlords declaring themselves as limited companies for tax purposes is, of course, the cut in landlord mortgage interest rates. The changes mean individuals are being taxed on mortgage payments as well rental income (i.e. it’s no longer just ‘profit’ from their buy to let that individual landlords pay tax on).
The unpopular rule changes were first announced by George Osborne in 2015, with the initial phase introduced shortly after. As of 2020, they have been fully implemented, meaning that landlords can now only claim a basic rate tax credit of 20% on mortgage interest—regardless of their income tax band.
You’ll pay more in income rather than corporation tax
The second reason for the mass exodus to limited company status is the fact that corporation tax (ranging from 19% to 25%) is often lower than income tax (which ranges from 20% to 45% depending on the band). The main rate of corporation tax is 25% for the financial year which began on 1 April 2024 (previously 25% in the financial year - 1 April 2023).
Although the corporation tax rate is no longer decreasing, many landlords still find it more tax-efficient than paying personal income tax.
So, it makes perfect sense to opt for corporation tax for many landlords. This includes those property types who enjoy the challenge of a renovation property, which they then go on to sell, for instance. They will pay less tax via a limited company (particularly if they’re already paying a higher rate of tax i.e. they are classed in the second or first highest tax band).
Landlords who prefer to invest in a buy to let and watch the value of the property accrue over time would be better off sticking to individual status, since the profit when they do sell may well be viewed as capital gains tax. Profits along the way, meanwhile, could be attributed to a spouse or other family members who are in the lowest tax band.
A third reason for an individual landlord to become a limited company concerns inheritance tax. You may be able to mitigate some of this in the form of trusts or shares to family.
Should you switch to corporation tax?
The best person to consult as to whether you should opt to become a limited company and pay corporation as opposed to income tax, is the person who will be happy to sit and crunch the numbers for you i.e. your accountant. If you don’t have one already, then opt for an individual or company specialising in property (there have been many changes in the sector in recent years and they’ll have kept up to date with them).
Author
Chris Kirkwood
