A sole trader runs a business personally, with profits treated as personal income and full liability for debts. A limited company operates as a distinct legal entity, separate from its owners, paying corporation tax, with shareholders enjoying limited liability and income through salary or dividends. Switching to a limited company can offer tax benefits, asset protection, a professional image, easier finance, and growth opportunities. However, landlords must consider legal, tax, and financial factors, including property transfers, stamp duty, mortgage changes, and ongoing reporting requirements.
Why Landlords Should Switch from Sole Trader to Limited Company
1. Save on Taxes
Running a business as a limited company can help pay less tax. The company pays corporation tax, which can be lower than personal income tax. You can also take money as dividends, which may be taxed less than regular income. However, after the £500 dividend allowance, dividends are taxed at 8.75% for basic-rate taxpayers and up to 39.35% for higher-rate taxpayers.
2. Protect Your Personal Things
A limited company is its own separate business. This means if the company owes money or faces legal problems, your personal things like your house or car are usually safe.
3. Look More Professional
Having a company makes your business look more serious. Tenants, banks, and suppliers may trust you more and work better with you.
4. Easier to Grow and Get Investors
A company can sell shares to get new investors or partners. It also makes it easier to buy more properties, get loans, and plan for the future.
Key Considerations Before Switching to Limited Company
Impact on Mortgage Agreements
When you transfer properties to a limited company, you will usually need to pay off your current mortgage. Lenders typically do not allow personal mortgages to stay under a company’s name. Once the mortgage is paid off, you can apply for a new one under the company’s name. The new mortgage may have different terms, like higher interest rates, fees, or lower borrowing limits. If the company is new or has a weak credit history, lenders may also ask for personal guarantees.
Changes in Tax Obligations
Rental profits as a sole trader are taxed as personal income. In a limited company, profits are subject to corporation tax, and personal income is drawn via salary or dividends. Assessing this change with professional advice is crucial to understand overall tax liability.
Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT)
If you transfer your rental property to a limited company you may avoid paying CGT and SDLT if you qualify for Incorporation Relief. Normally rental income is considered investment so CGT and SDLT apply. But if your rental activity is treated as a trading business Incorporation Relief can be claimed and CGT/SDLT may not trigger.
Potential Accounting and Administration Costs
Limited companies have additional compliance requirements, including annual accounts, corporation tax returns, and Companies House filings. Expect higher accountancy fees and more administrative work than as a sole trader.
Impact on Personal Income and Dividends
Company directors cannot withdraw business profits directly. Income is drawn through salary, dividends, or director’s loans, each with different tax implications, affecting cash flow and personal financial planning.
Set Up Your Limited Company
To register your company, pick a unique name, choose at least one director, give out shares, and provide an official office address.
Transfer Your Properties to the Company
Legally transfer property ownership to the company by updating title deeds with the Land Registry and informing HMRC. Pay any applicable SDLT and consider potential CGT. Solicitors typically handle this process for compliance.
Update Contracts and Agreements
Tenancy agreements to reflect the company as landlord Update your insurance and tell your tenants, letting agents, and service providers about the change.
Change Your Banking and Accounting
Open a bank account in the company’s name to keep business money separate from your own. Implement bookkeeping systems or accounting software to manage records and ensure compliance with reporting obligations.
Common Mistakes Landlords Make When Switching to a Limited Company
- Ignoring Mortgage Restrictions: Some buy to let mortgages cannot be transferred to a company. Always check lender terms to avoid delays or higher rates.
- Underestimating Costs: Legal fees, accountancy charges, property transfer costs, and taxes like SDLT or CGT can add up. Budget carefully.
- Poor Record-Keeping: Wrong or messy records can cause legal problems and fines.
- Missing Tax Deadlines: Corporation tax and company reports must be submitted on time. If you miss the deadlines, you could get fined or have to pay extra fees.
Pros and Cons of Switching to Limited Company as a Landlord
Pros:
- Tax Benefits – Potential savings through lower corporation tax rates and flexible income extraction methods such as dividends.
- Limited Liability – Personal assets are generally protected from business debts and legal claims.
- Growth Potential – A company structure can make it easier to attract investment, expand the property portfolio, and plan for succession.
Cons:
- Setup and Administration Costs – Incorporating a company involves legal, accountancy, and property transfer expenses, which can be substantial.
- Legal Fees – Professional advice is essential for compliance, adding to the overall cost.
- Stricter Compliance – Limited companies must meet ongoing filing and reporting requirements, which demand more time and accurate record-keeping.
Switching from a sole trader to a limited company requires careful planning, but it offers several advantages, such as saving money on taxes, protecting personal assets like your home or car, and making business management easier. Getting professional advice helps you fully benefit from the change, making your business safer and giving you peace of mind.
If you’re ready to make the move, book your free consultation with our experienced accountants today and let us support you through the transition.
