Limited Company vs. Sole Trader vs. LLP

Andy Smith / January 2, 2019

Tags: Blog



Increasingly more landlords today are opting to become a limited company or limited partnership as opposed to being a sole trader. In many cases, this makes sense – especially for those currently sitting in the higher tax bracket of 40% (or who are about to be pushed into it, thanks to the government’s slashing of relief on mortgage interest expenses in the summer 2015 budget). Here. we outline all three options and how they differ for tax purposes:

Limited company

Your business becomes separate from you, an individual i.e. you pay corporation tax instead of income tax. You have to register for limited company status at Companies House and complete a corporation tax return on an annual basis. It can prove much more tax efficient than being a sole trader, since you can opt to receive some of your salary in the form of dividends.

Also, if the business goes under, you won’t lose your house (since you and your business are viewed as separate entities under law).

Property renovators (i.e. those who buy a run-down property and make it liveable again) will be better off becoming a limited company. That’s because they are seen as traders. Become a limited company and the profits would be charged as corporation tax and not income tax. This is currently 19%, whereas income tax is 20%. Even better, the corporation tax is due to reduce to 17% for the year 2020.

Sole trader

Working under your own name and as an individual means you are solely responsible for the business – and paying tax. You’ll have to file a self-assessment form every year.

Most buy to let landlords have been until recently, sole traders. However, as we mentioned at the start of this article, the cut to interest relief has pushed landlords with big outstanding mortgages into the higher tax brackets in many cases. It’s still worth being a sole trader as a landlord - especially if you’re a cash buyer, since the cut in mortgage interest relief won’t affect you anyway.

Limited Liability Partnership (LLP)

In this instance, you’ll work with another individual, or more than one. The type of companies that have this structure tends to be groups of professionals such as architects, engineers etc. It is particularly popular within the construction industry. Again, because it’s a limited company it has to be registered at Companies House.

An LLP can own both freehold and leasehold property because, as a company, it is separate from the individuals who work there (they pay income tax by sending in an annual self-assessment). Profits on any property held by the company as a separate legal entity would then come under the lower rate corporation tax.

Regardless of whether you are a property ‘trader’ or ‘investor’, it is always worth having a chat with an accountant who is well-versed in property matters. That’s because he or she will be able to give you an overall picture of your finances and the property industry as a whole. They may also be able to warn you of any forthcoming changes they may have heard about.

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Tags: Blog

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