More SME landlords are seeking advice about whether now is the right time to incorporate, before progressing plans to secure more finance and expand their portfolios. But is now the right time?

Research conducted recently by Handelsbanken has revealed that almost half – 49 per cent – of professional landlords, those with four or more rental properties, are planning to expand their portfolios. In most cases, they should consider incorporating if they haven’t already done so, if only to establish whether it would be worth their while.

Operating property letting businesses through limited companies has grown in popularity in recent years for a number of reasons. Primarily the shift to this business structure was driven by tax changes, which restricted the amount of tax relief that individual landlords could claim on their residential property financing costs. With limited companies still able to claim full tax relief for financing costs, and interest rates expected to increase over the coming months, corporate ownership is looking increasingly attractive. 

However, limited company structures have other benefits, which should not be overlooked. Among the other potential benefits is the control that the structure offers landlords in terms of determining their income. For example, managing a property portfolio within a corporate structure may be more tax efficient, particularly if the landlord is intending to leave profits in the business to reinvest. 

Taking less income from the business would incur  lower income tax charges, and currently the rate of corporation tax payable on company profits, is comparatively low, although this could change in the future of course.

Limited companies also offer landlords limited liability status, which can help to ring fence risk and protect landlords’ own personal assets in the event of commercial claims. It is also possible to appoint multiple shareholders, which can aid tax-efficient plans for succession.

The process of incorporating is not straightforward however and before making any decisions, landlords should seek professional tax advice.  If not planned properly, incorporating could lead to significant tax charges including capital gains tax (CGT) and stamp duty land tax (SDLT). Whilst larger-scale landlords may qualify for relief from these taxes, smaller-scale landlords and landlords who do not operate their businesses in partnership with other investors, may not qualify. 

For these landlords the initial tax cost of incorporating could be prohibitive even if longer term tax savings are achieved in future. In all cases, a thorough cost benefit analysis should be carried out and the criteria for qualifying for tax relief should be assessed. HMRC’s guidance on the matter states that as a minimum landlords must be able to demonstrate that they are spending at least 20 hours each week actively managing their portfolio. 

Clearly, this is not going to apply to accidental landlords, with just one or maybe two property lettings and even larger-scale landlords may struggle to meet the criteria if they work full-time doing something else.

Incorporation won’t be the right option for all buy-to-let landlords of course and while most banks are willing to fund property investments by companies and private individuals, it is important to bear in mind that the interest rates may be higher for companies. The tax benefit of incorporating should therefore be weighed against the potential increase in interest charges, which may negate the tax benefits achieved.

Much has changed for buy-to-let landlords in the past decade and the costs of managing a portfolio have risen exponentially. There are also many more compliance issues and potential liabilities to bear in mind. For example, landlords are required to carry out electrical and biosafety checks at regular intervals and vet tenants to ensure they have the correct immigration status.

For a growing number of private landlords, balancing risk and reward has become more challenging and in some cases, selling up has seemed the only sensible option. However, for others, expansion could provide a solution that is both rewarding and worthwhile. For these individuals, incorporation could reduce their personal risk at the same time as giving them more control over their income and greater flexibility for the future.

* Rebecca Wilkinson is a partner and property sector specialist at accountancy firm, Menzies LLP *