Buying HMO Property Through a Limited Company – Pros and Cons

Over the past decade, Houses in Multiple Occupations (HMOs) have become increasingly popular in the UK rental market. Unlike traditional rental property, HMO landlords let out a property to multiple tenants from different households, offering a more varied and often larger income stream. While the financial appeal of becoming an HMO landlord is clear, managing HMOs comes with strict obligations to both tenants and regulatory authorities, as they are closely monitored by housing authorities in the UK because of their social impact.

Although lower corporation tax rates and full mortgage interest deductions make limited companies attractive for HMO investors, there are important factors to consider. Higher SDLT, possible ATED charges, and increased administrative costs mean that buying an HMO through a limited company isn't always the best choice. Is this option right for you? Let’s explore this in the article.

Pros of Buying Through a Limited Company

Lower Tax on Rental Income and Capital Gains Tax (CGT)

Individuals managing HMO properties are taxed on their rental income at personal tax rates ranging from 20% to 45%. In contrast, limited companies are subject to corporation tax, which varies between 19% and 25%, depending on the company’s total taxable profits, with marginal relief available for profits between £50,000 and £250,000.

For individuals operating HMOs by themselves or via a partnership, the rental income is taxed at the following personal tax rates:

However, when an HMO is purchased through a limited company, the tax rates are generally lower:

When comparing these rates, it’s clear that companies are taxed at lower rates than sole traders. Additionally, when the property is sold, Capital Gains Tax (CGT) also differs. If the property is owned by a company, the sale is taxed at corporation tax rates (19% or 25%), whereas an individually owned property incurs CGT at 18% for basic rate taxpayers and 24% on any gains above the basic rate band.

Deductibility of Mortgage Interest Payments

One benefit of operating HMOs through a limited company is that the mortgage interest paid is deductible in full. Currently, the only other regime enjoying the mortgage interest deductions is the FHL regime. However, following its abolishment in April 2025, companies will be the only entities benefitting from the mortgage interest payments.

Individuals and partnerships will continue to claim the basic rate relief, which is relatively small in comparison to the whole deduction available for companies. The basic rate relief is generally given as a credit to landlords to reduce their tax liability by 20% of the mortgage interest (or finance cost).

Flexible Succession Planning

Companies have a relatively broader option for inheritance tax planning than individuals. This is especially true because there is no stamp duty on gifting shares
and lower CGT on shares compared to residential property rates, like an HMO.

Another inheritance tax planning is around the family investment company, an inheritance tax plan that allows the older generations to maintain control over the assets while facilitating the transfer of value to younger generations while avoiding immediate inheritance tax (IHT) charges. With careful planning, a comprehensive and effective inheritance plan can be developed to meet an individual’s specific needs and goals.

Cons of Buying Through a Limited Company

Higher Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) is charged on all land and building transactions in England and Northern Ireland. The applicable SDLT rates depend on factors like the buyer's residency status, whether the buyer is an individual or a company, etc. Where the buyer is not a UK resident and not an individual, SDLT is payable at the higher rates.

The non-UK resident rates apply to companies that are either not resident in the UK for tax purposes or are controlled by shareholders who are not resident in the UK.

Annual Tax on Enveloped Dwellings (ATED)

The Annual Tax on Enveloped Dwellings (ATED) is a tax regime introduced by the UK government to discourage the ownership of UK residential property by companies. It particularly targets properties held within corporate structures. This annual tax is levied on UK residential properties valued above £500,000 and owned by "non-natural persons," mainly companies.

The amount of ATED payable varies depending on the property's value, either at the time of purchase or as of 1 April 2022, whichever is later:

However, companies engaged in certain activities, such as property letting, property trading, or charities, may qualify for relief from ATED charges. Although no tax may be due in these cases, an ATED return must still be filed. Unlike other taxes, ATED is an advanced-looking tax regime.

Therefore, the deadline for filing an ATED return is the 30th of April for the relevant year for ATED purposes. For instance, the deadline for filing an ATED return for 2024/25 (from 1 April 2024 to 31 March 2025) is 30 April 2024. An ATED return filed after this date may attract late filing or late payment penalties and interests accordingly.

Higher Administration Cost

Operating a limited company comes with a large administration cost. These costs, too, may vary depending on the company's residency status. For UK-resident companies, the main burden is preparing accounts in compliance with Companies House and Corporation Tax Return, which may cost around £700 per year.

For non-resident companies with an HMO property in the UK, registration of overseas entity (ROE), annual update filing, and corporation tax return filing may add up to around £2,000 per year, including the professional fees. Meanwhile, individuals with the same property portfolio do not have such taxes to worry about. They can declare total rental income in their personal tax return.

Difficult to Find a Buyer

Owning an HMO property through a limited company is difficult not only because of the administration and operating burden but also because of disposal complications. Tax implications may differ from a traditional property sale, and not all buyers are comfortable with or interested in acquiring a company rather than a direct property ownership, as the buyer of the company may be hesitant to purchase a company due to concerns about its financial history or the complexities of taking over an existing entity. Additionally, the tax treatment of the sale might be less favourable compared to selling the property outright.

Double Taxation During Extraction

Sure, corporation tax rates are lower than those applicable to individuals. However, if that is the only reason you’ve chosen to purchase an HMO via a limited company, you may have missed the bigger picture. When a profit is extracted from a limited company, directors have a few options, such as salaries, dividends, a director’s loan account, etc.

These will be taxed in personal tax rates. Directors extracting profit as salaries will pay tax on the income at the general rates. However, dividend tax rates are different and are follows:

While dividend tax rates are relatively lower, dividend distributions are not deductible for corporation tax purposes and are taxed at 19% or 25%, which is not the case for salaries and interests as profit-extracting methods.

It is one of the reasons why the popular strategy ‘One Property, one company’ does not work for everyone. Individuals who find themselves stuck in such situations have the de-enveloping option. While comparatively less costly for UK-resident companies, removing companies from ROE costs £706 per company.

Conclusion

In conclusion, purchasing and managing an HMO property through a limited company offers a variety of tax advantages, particularly lower corporation tax rates and deductible mortgage interest, making it an attractive option for investors. The flexibility in succession planning through corporate structures is another notable benefit. However, the decision to operate through a limited company should not be taken lightly, as there are additional costs to consider, including higher SDLT, ATED obligations, and increased administrative burdens.

Additionally, the complexities around profit extraction and potential difficulties in selling a company-owned HMO must be factored into the equation. Each investor’s circumstances and long-term goals will dictate whether the benefits of using a limited company outweigh the potential drawbacks. Careful planning and professional advice are essential to making the right decision.