Buy-to-let landlords who operate as a limited company are still entitled to claim mortgage interest tax relief. If you are a landlord you may wish to consider setting up a limited company as an alternative way of managing your rental properties. Here’s our guide on how to set up a limited company.
Why set up a limited company?
As of April 2020, many landlords are losing valuable tax relief due to the fact that mortgage expenses from rental income can no longer be deducted from your taxes. All landlords now receive a tax credit of a fixed rate of 20% of their mortgage interest payments. Previously, landlords in higher tax brackets were able to claim a higher tax relief. Limited companies, on the other hand, are exempt from this new rule.
Choose between a private and public limited company
If you’re interested in setting up a limited company for property rental, you can choose between a private or public limited company. Public companies are different in that you have the option to sell shares to the public. There is more red tape involved in setting up a public limited company, but you will have more opportunity to raise capital and an exit strategy in place if necessary
Your limited company name
You’re required to choose a name for your business if you set up a limited company. This cannot be the same as or too similar to that of another registered business. Your company name must end in Ltd
Forming the limited company
There are several steps you need to take when forming your limited company. This is to ensure you meet all the legal requirements. Here is how to set up a limited compa
Company shares and shareholders and director
You need to appoint a company director, whether this is yourself or somebody else. You also need at least one shareholder. Limited companies are technically owned by
shareholders. It is possible, however, to be the sole shareholder and director yourself and own 100% of the company.
Your duties and responsibilities as a limited company director
If you choose to take on the role of limited company director, your duties and responsibilities will include keeping and updating company records, accounts and taxes, corporation tax, and following all rules laid out by the company’s articles of association.
Registering a new limited company – the company formation process
In order to start a new limited company, you need to officially register your address and a SIC code. A standard industrial classification of economic activities (SIC) code is a way to categorise your company by sector and the nature of your business. You will need to register for corporation tax as well, and you can take care of all these steps with Companies House.
Documents you will need to complete to register a limited company
Companies House has a straightforward online platform allowing companies in most cases to register and start trading immediately. You will need to complete a few documents first. The first is the Memorandum of Association. This details each shareholder and their intentions with your company’s shares. This document can just include yourself if you’re the sole shareholder. The Articles of Association are also legally required. These outline the rules of your business and certain clauses of the Companies Act. Companies House can provide a standard template for this. Finally, you need to complete the Form IN01 which allows you to make various amendments.
Claiming back pre-trading expenses from your limited company
If you’re setting up a new business, you can claim back pre-trading expenses from your previous costs. For example, if you’ve invested a lot of personal funds into setting up your business, you can offset these expenses against your turnover for corporation tax, as long as you’ve begun trading.
Do I need an accountant to set up a limited company?
There is no actual legal requirement to have an accountant to set up a limited company. It is recommended, however, in order to better manage your finances. If your business becomes large enough, it will also be legally required to undergo an audit.
How much does it cost to set up a limited company?
It only costs £12 to register as a limited company. It’s important to take into account other expenses, however, such as legal or administration fees. You can pay to register online with a credit or debit card once you’ve completed all the necessary documents.
How much tax do you pay if you have a limited company
Corporation tax is charged at 19% of your total profits, but you won’t have to pay income tax or national insurance. You will also be entitled to tax reductions based on taxable business expenses. The amount of tax you pay is therefore directly dependent on your profits.
How do I pay myself?
In order to pay yourself after setting up a limited company you have two options. If you are the director of your own limited company, you can pay yourself with a dividend. For maximum tax efficiency you could also take a salary. Your salary will count as a business expense and could help to reduce your corporation tax. You could even pay yourself with a combination of dividends and salary. Speak to a financial advisor and find out which solution works best for you.
If you’re wondering how to set up a limited company, it’s actually easier than it sounds. You can take care of everything using the Companies House online government portal. It doesn’t cost much to register, and the profits only depend on the productivity of your business. Your company could be trading within the next day.
In order to set up a limited company to rent property, speak to a financial advisor to find out if it’s worth your while taking into account the tax implications. We help buy-to-let landlords incorporate their property rental businesses. If you would like further information on how to set up a limited company, get in touch today.