Deciding on whether to incorporate however, is not necessarily straightforward. There are many factors at stake, meaning it ultimately boils down to the landlord’s individual circumstances and business strategy.
Let’s shine a light on some of the high-level tax considerations a landlord is likely to be weighing up. I will caveat that comparisons with personal ownership can be very nuanced, so I’ll avoid sweeping statements and just stick to a few basic scenarios.
To start, many landlords will be looking at the economics of incorporating their existing portfolio through a ‘sale and purchase’. This can be expensive, as it will be subject to Capital Gains Tax (CGT) and Stamp Duty, so may only appeal to properties with lower values or marginal capital gains, or to landlords who are able to recoup the cost through a long-term investment strategy.
Cashflow is a crucial consideration. The scenario below compares a limited company to personal owners in the basic and higher rate tax brackets. This illustration shows a 20% taxpayer is better off as an individual, but a 40% taxpayer would achieve a higher annual return under a limited company – where the reduced tax liability more than offsets the higher mortgage cost. Scale this comparison across an entire portfolio and over a longer timeframe, and you can quickly see how the financial impact could accumulate into a substantial figure.