In fact, according to resent research, 41,700 new landlord-owned limited companies were registered in 2020: an increase of 23% compared with the previous year.

Particularly for landlords that have Houses with Multiple Occupation (HMO) properties, there are many clear advantages to establishing a limited company. Here’s why setting up a limited company is becoming such a popular course of action for landlords with HMOs:

What are the advantages of setting up a limited company as a HMO landlord?

  1. Tax Rates

Private landlords pay between 20-45% income tax on profits, depending on whether or not you are a higher rate taxpayer. In contrast, limited companies currently pay corporation tax of 19%, regardless of the amount of income.

Even though the basic rate figure for corporation tax is set to rise slightly from 2023 for companies with profits exceeding £250,000 (to 25%), the 19% rate will continue to apply to where profits are £50,000 or less. This will work well for lower-income HMO landlords, but there will also be relief for limited companies with profits between £50,000-£250,000 ensuring that even landlords with multiple HMO properties won’t feel too much of a sting from the changing tax rates.

  1. Tax Relief

The amount of tax relief private landlords can claim has been cut increasingly since the implementation of legislation changes in 2017. From the 2020/21 tax year, self-employed landlords can no longer deduct finance costs (such as HMO mortgage interest payments) from their rental income before calculating profits. Rather, all independent rental property costs are now subject to tax reduction at the basic rate of only 20%.

In contrast, as a HMO landlord with a limited company, you can still claim back 100% of your mortgage interest. Even though mortgage interest rates tend to be higher for companies than individual landlords, you can claim back the interest (releasing savings through Capital Gains tax relief). This means that setting up a limited company is beneficial for landlords with mortgages on HMO properties.

  1. Liability

For landlords with limited companies, you have certain protection against accidents that take place at your property. While private landlords are personally liable if someone gets injured and sues, operating as a limited company protects your personal finances through limited liability. If you are covered by limited liability, a judge can only award compensation from the amount you have invested in the business and cannot touch your personal assets. In other words, the business is responsible, not you.

To further protect yourself and your assets, you might also consider obtaining professional indemnity and personal liability insurance.

How else would setting up a limited company for your HMO impact you?

While holding property as a limited company certainly has many advantages for landlords with HMOs, it is important to consider the whole picture before changing the structure of your business.

Responsibilities

Choosing to operate as a limited company comes with more responsibilities than operating as a sole trader. Rather than just filing self-assessment tax returns, you will have to register with Companies House and will be required to complete certain statutory responsibilities – such as filing accounts and completing a company tax return.

Restrictions

While setting up a limited company has many financial benefits, it also comes with some financial restrictions. Since the company is a legal entity in its own right, all assets and profits belong to the company. This means that profits can’t simply be spent on whatever you like, they must be withdrawn as a formal salary, dividends and expenses. Furthermore you must keep thorough records of all business transactions to prove they were related to the company and not your personal life.

Should you set up a limited company for your HMO?

Having explored the advantages and considered the complexities of establishing a limited company as a HMO landlord, you may be considering whether this would be the right move for you.

Certainly, it is anticipated that even more landlords will switch to operating as a limited company this year. However, if you are at all unsure as to which pathway would be best for you, we recommend that you talk to an accountant with property tax experience before making any decisions. While there are clear advantages to HMO landlords operating as a limited company, it’s important to ensure that it’s the right decision for your business.

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