Should you operate your HMO as a private individual or a limited company?

Questions Facing HMO Landlords

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.

According to estate agency Hamptons, in 2020, 41,700 new landlord limited companies were formed, up 23% on the previous year*1. There are now nearly a quarter of a million such companies.

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 of 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:

  • Tax rates

As a private landlord, you pay income tax on your profits, depending on your annual income, at a rate of 20% for basic rate taxpayers and up to 45% if you are a higher rate taxpayer.

Limited companies pay corporation tax on their profits - currently 19% - regardless of your 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

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

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

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

Private landlords are personally liable for any accidents caused by a fault at their property. This means that if a tenant gets injured and sued, your personal finances could be at risk.

As a limited company, as the name 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

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.

Can you get a limited company HMO mortgage?

Yes, there are a number of specialist HMO mortgage lenders such as Paragon, Precise and Aldermore who are happy to help you finance the purchase of a property. We will provide you with guidance and advice to get you the best HMO mortgage deal. As an independent broker, we have access to lenders offering mortgage loans for both private and limited company landlords.

Contact us today for expert advice on HMO finance.

Please note we are not tax advisors or accountants and do not offer tax advice. You need to speak to your own tax adviser or accountant to see what the implications would be based on your own personal circumstances.

*1 Letting Agent Today, 18 Jan 2021

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