As the UK property market simmers with anticipation in 2024, predicted to offer stable growth and potentially rising rents, astute investors are scrutinizing their strategies. One pivotal decision looms: Should they hold their rental properties under their personal name or through a limited liability company (Buy to let limited liability company – LLC)? Both options boast unique advantages and disadvantages, transforming this choice into a financial crossroads.
Number of properties:
Individuals: Roughly 15.7 million residential properties in the UK are owned by individuals, representing around 84% of the total stock. Individuals tend to own a wider range of property types, including houses, flats, bungalows, and terraced houses. They are also more likely to be owner-occupiers, living in the property themselves.
Companies: Companies, including investment firms, housing associations, and developers, own approximately 2.9 million properties, constituting around 16% of the total. Companies often specialize in specific property types, such as apartments, student accommodation, or commercial buildings. They primarily focus on buy-to-let investments, generating rental income.
Personal Ownership: The tried-and-true method, owning property under your personal name, requires minimal initial setup and paperwork. However, it exposes you to the harsh realities of unlimited liability. Any losses or debts incurred by the property become yours to bear. Additionally, your rental income gets taxed at your income tax rate, which can be significantly higher than the corporation tax rate for LLCs.
Advantages:
Simple setup and minimal paperwork: No need for company formation or annual accounts.
Easier access to mortgages: Personal mortgages often come with lower interest rates and simpler application processes. Financial institutions are more likely to fund individuals with credit score rather LLCs established in the UK.
No additional administrative costs: Avoid the ongoing fees associated with maintaining a LLC.
Disadvantages:
Unlimited liability: Your personal assets are at risk if the property encounters financial difficulties.
Higher tax burden: Rental income taxed at your personal income tax rate, potentially reaching higher brackets.
Limited tax planning: Fewer opportunities for minimizing Inheritance Tax (IHT), Capital Gains Tax (CGT), and Stamp Duty and Land Tax (SDLT).
Limited Liability Company: LLC offers a protective shield. Your personal liability is restricted to your investment in the company, meaning your personal assets remain safe from property-related debts. Company is to hold and manage residential properties for rental purposes. Instead of purchasing properties in their individual names, property investors create a limited company, and this company becomes the owner of the rental properties.
Advantages:
Limited liability: Protects your personal assets from property-related debts and losses.
Lower tax burden: Corporation tax rate (19% to 25%) is often lower than personal income tax, especially for high earners it can go up to 45%. Due to this reason it is more attractive to setup a buy to let LLC in the UK market.
Mortgage interest deduction: Mortgage interest can be offset against corporation tax in full, which will reducing your tax liability. The Interest Relief Restriction Section 24 applies to individual landlords which means that individual landlords can no longer deduct mortgage interest from rental income before calculating taxable profits. As per the rule, personal landlords can deduct tax liability as a tax claim up to 20% of the interest expense.
Enhanced tax planning: Greater flexibility to minimize Inheritance Tax, Capital Gains Tax, and Stamp Duty. If you are planning to transfer ownership of your rental properties to family members down the line, opting for a limited company structure could prove beneficial. The process of transferring ownership is simpler and more tax-efficient when it involves a limited company rather than passing on individual properties.
Profit distribution flexibility: Dividends are subject to different tax rates than PAYE income, providing potential tax benefits for shareholders.
Disadvantages:
Increased administrative burden: Setting up and maintaining an LLC involves additional paperwork and ongoing costs.
Potentially higher mortgage costs: Accessing certain types of mortgages can be more challenging for LLCs, leading to higher interest rates.
Complex tax filing: Requires preparation of annual accounts and company tax returns.
Market Trends:
Rising UK rent predictions for 2024 suggest potentially lucrative returns for both ownership structures.
Mortgage rates remain standard, benefiting personal ownership but also making LLC incorporation more attractive.
Tax complexity favors LLCs for higher earners, while simpler personal ownership might suit lower income brackets.
Deciding Your Fate:
Choosing between personal ownership and an LLC ultimately depends on your unique circumstances and goals. Here are some key factors to consider:
Your current income tax rate: The potential corporation tax savings of an LLC become more significant with higher income tax brackets.
Your risk tolerance: Prioritize peace of mind with the liability protection of an LLC, even if it involves additional cost and complexity.
Your long-term investment plans: An LLC allows greater portfolio expansion and advanced tax planning, beneficial for long-term investors.
Your comfort with administrative tasks: Consider your willingness to handle the additional paperwork and compliance requirements of an LLC.
Remember: This article provides general information and should not be considered as financial advice. Consulting with a qualified financial advisor or accountant is crucial before making any investment decisions.
Disclaimer: This blog post is for informational purposes only and does not constitute financial advice. Please seek professional financial advice before making any investment decisions.