One of the key questions facing landlords owning a House in Multiple Occupation (HMO) is whether to operate as a private individual or as a limited company.
The latter has grown in popularity over recent years, particularly since 2017 when the government began reducing tax relief for individual property investors.
As with most things, the best approach will depend on your particular set of circumstances.
So, whether you are an HMO first-time landlord or have a few years’ experience behind you, it’s important to consider all the contributing factors before making an informed decision.
Here we take a look at the main areas of difference:
How do tax rates differ for private and limited company HMO landlords?
As a private landlord you pay income tax on your profits, depending on your annual income. This is 20% for basic rate taxpayers and up to 45% if you are a higher rate tax payer.
Limited companies pay corporation tax on their profits – currently 19% – regardless of their personal or the company’s annual income.
This rate will change in 2023, with a tapered rise up to 25% for those with profits over £250,000.
The 19% rate will continue to apply to companies with profits of £50,000 or less, with marginal relief for companies with profits below £250,000.
Tax relief on HMOs: How much for private and limited company landlords?
Since 2017 the amount of tax relief a private landlord can claim has been gradually reduced.
As of the 2020/21 tax year, private landlords can no longer deduct finance costs, like HMO mortgage interest payments, from the rental income. Instead, mortgage finance costs are subject to a basic rate tax reduction of 20%.
This has a direct impact on potential profits for private landlords and is one of the reasons more landlords are investigating the limited company approach where 100% mortgage interest relief can still be claimed.
Filing accounts – is it easier for private or limited company HMO landlords?
Operating as a limited company comes with more administration costs and statutory responsibilities such as completing an annual company tax return and filing accounts with Companies House. This can add costs such as accountancy fees.
Annual paperwork can be kept to a minimum and finances more informal when you manage your HMO portfolio as a private landlord.
Interest rates on mortgages for limited company and private HMO landlords
Interest rates tend to be lower for private landlords than for a limited company, with many lenders charging higher rates and fees.
Despite their popularity, HMO mortgages are still considered a niche product and expert advice from an HMO mortgage broker is essential to finding the right deal.
This will ensure the profits made from rental income are maximised, therefore reducing the impact of associated costs.
Liability: What responsibility do private and limited company landlords have?
Private landlords are personally liable for any accidents caused by a fault at their property. This means that if a tenant gets injured and sues, your personal finances could be at risk.
As a limited company, as the names suggests, you have limited liability and your personal finances are more protected.
In the event a tenant sues following an accident at the property, liability will be limited to the value of your financial investment in the business.
You can further mitigate this risk by taking out professional indemnity and personal liability insurance.
Access to profits: Limited company v private landlord
As a private landlord, what you earn from rent is yours to use as you wish. You have full access to all of your profits for personal use at any time.
However, a limited company is a legal entity in its own right, with the assets and profits belonging to the company. This means profits have to be withdrawn as a salary and/or dividends and records need to be kept of all these transactions.
Vincent Burch is mortgage director at Vincent Burch Mortgage Services
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