If you're a landlord, one key decision is whether to own your property as a sole trader, or through a limited company. This choice will affect how you are taxed, your legal responsibilities, and your personal liability.
In this article, we will break down the main differences to help you decide which structure works best for you.
Sole Trader vs Ltd Company
Sole Trader: A sole trader, also referred to as a sole proprietorship, is a business owned and operated by a single individual, where there is no legal separation between the owner and the business itself.
Limited Company (Ltd): A limited company, commonly referred to as a corporation in the UK, is a separate legal entity, with a clear distinction between the company's assets and earnings and those of its owners and investors.
Key Differences At A Glance
| Sole Trader | Limited Company | |
| Tax Implications | Profits taxed as personal income. Tax rates will vary from 20 - 45% based on your tax band which depends on your total income. | Profits are taxed at the corporation tax rate. In the UK this is currently main rate of 25% for profits over £250K, small rate of 19% for profits under £50K and a marginal rate is applied for profits between these 2 figures . |
| Admin and Legal | Admin and legal requirements tend to be more simplistic. Typically, only a self assessment return is required to be filed. | Admin and legal requirements can become more complex for a Ltd company. A Ltd company will be required to file a Corporation Tax return (CT600), full accounts to HMRC, and abridged accounts to Companies House and an annual confirmation statement. |
| Liability | Unlimited personal liability. Owner of the property is liable for any debts and legal obligations. | Limited liability protection. The business is liable for any debts and obligations, rather than the individual themselves. |
| Capital Gains Tax (CGT) | As a sole trader you will pay between 18 - 24%, depending on your rate of income tax on a gain if you dispose of an asset. | Ltd companies do not pay CGT. Instead they pay corporation tax which can vary between 19 - 25% depending on the businesses profits, if they sell an asset at a profit. However, if they sell at a loss, they can carry this loss forward. |
| Perception & Credibility | Seen as an individual landlord. | As a Ltd company, you may appear more professional to tenant, potential investors and/or lenders. |
Tax Implications
The way your rental income is taxed as a landlord largely depends on whether the property is held in your personal name (as a sole trader) or through a limited company.
Sole Trader
- Profits from rental income are taxed as personal income.
- Personal income tax rates can range from 20% (basic rate) - 45% (additional rate).
- Profits are reported via self-assessment with HMRC.
Limited Company
- Profits from rental income are taxed between 19% - 25%. This varies with the businesses profits. Profits between £50,000 - £250,000 will be subject to marginal rate relief (MRR). Any profits over £250,000 will face 25% Corporation Tax.
- Withdrawing profits as dividends will mean additional personal tax applies. Dividend tax rates currently vary between 8.75% (basic rate) - 39.35% (additional rate).
Admin and Legal
Tax isn't the only thing to think about when weighing up the pros and cons of incorporating a limited company as a landlord. There are also legal and administrative responsibilities depending on how you proceed. Being a sole trader is usually more straightforward, whilst having a limited company comes with extra paperwork and further obligations.
Sole Trader
- As a landlord, you must register for self assessment with HMRC. You must then file this return annually to HMRC.
- Keep records of rental income and allowable expenses, leading to simpler bookkeeping and fewer administrative tasks.
Limited Company
- As a Ltd company, you must file annual accounts and an annual confirmation statement with Companies House.
- You must also file a Corporation Tax Return (CT600) annually to HMRC.
- You must keep a record of any dividends paid out and any outstanding loans.
- You will also be required to set up a separate business bank account for the business.
Liability
When deciding whether to incorporate as a landlord, it is important to think about liability. If you are a sole trader, you’re personally liable for any debts or legal obligations. If you set up a limited company, the business will be liable for any debts and legal obligations, keeping it separate from your personal assets.
Sole Trader
- Personally liable for any debts and legal obligations. This means any personal assets, such as your savings, could be at risk.
- No legal separation between you and the business.
Limited Company
- The business is liable for any debts and obligations, rather than the individual themselves. This means personal assets will be protected.
- The company is a separate legal entity to the owners.
Capital Gains Tax (CGT)
When you sell a property for a profit, you may need to pay Capital Gains Tax (CGT) on the profit. The way this is calculated depends on whether the property is owned as a sole trader or by your limited company.
Sole Trader
- Sole traders will be personally liable for any Capital Gains Tax.
- Capital Gains Tax rates can vary between 18 - 24%, this all depends on your income tax band.
- Qualify for £3,000 CGT allowance (Untaxed).
Limited Company
- Company pays corporation tax rather than CGT. This can vary between 19 - 25%, depending on the businesses profits.
- There is no CGT allowance for companies.
- If the company wanted to withdraw these profits, then it is likely to trigger dividend taxes.
When Should A Landlord Incorporate?
If operating as a sole trader, it's worth thinking about your goals and where your business is heading before incorporating as a limited company. The right timing can support business growth and stability.
One of the main advantages of incorporating is limited liability, along with the potential for lower tax on profits. However, this comes with more admin and higher ongoing costs. For smaller businesses with modest profits, incorporation might not be worthwhile right away, but it can make more sense as your operations expand.
Looking For Further Information?
Hopefully this article has helped clarify the pros and cons of incorporating as a landlord. For more information on topics related to running your property company, feel free to explore our Knowledge Base. If you are looking for any further information, do not hesitate to contact us.
