When it comes to setting up your property business for success, choosing the right business structure is paramount.

Deciding whether to operate as a sole trader can be difficult, as each option will shape your tax burden and financial responsibilities in different ways. In this blog, we go over the pros and cons of incorporation vs operating as a sole trader. Let’s dive in.

Benefits of a limited company structure

Tax efficiency

The tax treatment of rental income will vary depending on whether you’re renting as an individual landlord or through a limited company. In a company, rental profits are subjected to corporation tax between 19% and 25% – resulting in a much lower rate compared to sole traders in higher income tax brackets.

Additionally, limited companies can also deduct their mortgage interest as a business expense, while self-employed individuals can only claim a tax credit worth up to 20% of the same cost.

Profit retention

Opting for a limited company structure allows property investors to reinvest their profits back into the business after corporation tax, which can make it easier to expand property portfolios.

By strategically drawing a combination of salary and dividends, limited company directors can also pay themselves in a more tax-efficient way.

Liability protection

Property investment has risks, from potential tenant disputes to unforeseen maintenance costs. However, with a limited company structure, these liabilities won’t usually extend to your personal assets.

This means your estate, from your residence to personal savings, will have more protection if the company faces financial challenges.

Professional branding

Operating as a limited company can add an element of prestige to your property business. This can make negotiations smoother whether you’re dealing with agents, property developers or potential joint venture partners. You may even find it easier to access bank loans or attract investors.

Challenges of a limited company structure

Administrative duties

With more tax-saving opportunities comes more paperwork and reporting obligations. Managing a company means grappling with more comprehensive recordkeeping requirements, preparing annual returns for Companies House and staying compliant with tighter, ever-evolving regulations.

That means you’ll likely need to dedicate more of your time to filing paperwork – unless you hire a professional to manage these tasks for you.

Regulatory oversight

Unlike personal property ownership, a limited company is bound by the Companies Act. This means a stricter regimen of transparency, documentation and deadlines, with penalties for non-compliance.

Potential of financing complexities

Securing a buy-to-let mortgage as a company can sometimes be more challenging.

Lenders often have stricter criteria, require bigger deposits and charge higher interest rates if you purchase a property through a company instead of as a sole trader.

Advantages of sole trading for property investors

So, what about remaining as a sole trader?

Simplicity

The administrative process for individual landlords is much more straightforward than for incorporated businesses.

Without the extra reporting requirements and more complex accounting, property investors can spend more time focusing on their business and less on paperwork.

Direct control

As a sole trader, you have complete control over your property business. That means you get the final say about how to to manage your assets. Instead of answering to shareholders, you can make every decision promptly, from tenant selection to property acquisition and rental pricing.

Drawbacks of sole trading for property investors

Personal liability

A significant downside for individual property owners is that your business finances and your personal finances are intertwined. While that means you can take home 100% of the profits, you’ll also be personally liable if something goes wrong or your business incurs debts.

Growth restrictions

Sole traders might find it challenging to expand their property portfolio as rapidly as they would like. Lenders may see your business as high-risk and be more conservative in their offerings.

And without the ability to retain and reinvest profits in the same way as a limited company, scaling up may require you to pay capital out of your own pocket.

Other considerations

If you decide to incorporate your sole trader property business, you’ll need to sell any existing properties to your new company. This can trigger a capital gains tax (CGT) charge in cases where a property has gone up in value.

Navigating CGT can be difficult, so we’d recommend speaking to an accountant before transferring any properties.

Conclusion

Deciding on the best structure for your business isn’t merely about the present – it should also take into account future plans and growth. At some point, transitioning to a limited company becomes a wise move – but it’s not without its nuances.

So no matter whether you’re unsure which path to follow or you just want some reassurance, it’s always best to seek professional advice. As expert accountants for property investors, we can help assess whether you’ll be better off as a sole trader or a limited company.

Get in touch with us to discuss your property business.