The truth about the landlord loophole

The truth about the landlord loophole

It’s probably fair to say that the government is not exactly popular with property investors at this point in time.  While it’s understandable that they may wish to prioritise residential buyers in general (and first-time buyers in particular), the ideal way to do this is to work to smooth the path to property ownership (and indeed moving home) rather than to keep creating obstacles for landlords, especially when the UK has such high demand for rental property.  Be that as it may, change is a constant in life and people just have to deal with it.  One way some property investors have opted to deal with the current round of changes is to move their property portfolio from a private holding to an asset held by a limited company.  This move has been widely publicised as the “landlord loophole”, but, as is often the case, the situation is rather more complex than some media articles make it appear.

It is illegal to try to use a limited company structure purely to avoid tax

Please take careful note of that previous sentence.  If you move your property portfolio into a limited company purely to avoid tax you will be breaking the law and if you are caught (which is entirely possible, if not highly probable), then the best result you can hope for is that you wind up paying HMRC the tax you would have been due in the first place, plus you will have to write off the (far from inconsiderable costs) of setting up a limited company.  A worst-case scenario is that you spend a lot of money on lawyers only to end up being convicted of tax fraud, an offence which can land you in prison (albeit typically only in the very worst cases).

Using a limited company structure the wrong way can see landlords paying more tax

Private individuals pay income tax on all income, including any rental income from property held in their own name.  Limited companies pay corporation tax on all profits generated by the company.  When company profits are handed over to third parties, they become subject to some form of taxation, the exact form of which will depend on the way in which the money is disbursed.  The likeliest options are dividend tax and income tax.  If your income from other sources is minimal, and you depend on the income from your rental property to pay your bills then switching to a limited-company structure could be an expensive mistake as the double-taxation effect might lead to higher tax bills, if not now than in the future.  By contrast, if you are a higher earner and are currently in a position where you can afford to live without the rental income from your property portfolio, then switching to a limited-company structure may reduce the level of tax you pay.  In short, if the profits from a company are held within a company, they will only be subject to corporation tax, which is likely to be much less than the income tax higher earners would have paid.  Then if/when your income drops (e.g. you retire), you can start to withdraw income in a controlled (and tax-sensitive manner).

Limited companies can be useful for estate planning

On the subject of retirement, limited companies can be useful from the point of view of estate planning especially for property investors, since they provide a convenient way to apportion the benefits of your estate.  For example, if you currently own two properties and bequeath one to each of your children, circumstances may conspire to deal one of them a much better hand than the other, whereas if both properties are held in a limited company which is bequeathed to your children in equal shares, then they benefit from it equally.


Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of estate planning. For these services we act as introducer only.

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