How to Set up LLC for a Rental Property Business?

Set up LLC for a Rental Property Business

As the government brings in changes on the rental property business landscape, landlords will now have to fork out more in terms of tax. Interest on borrowings will henceforth be relieved at only the basic rate; this simply means that landlords get hauled into higher tax brackets and rates of interest. Consequently, the attractive option in the changed scenario is to opt for a rental property business setup.

This offers many advantages – such as lower tax and offset of interest charges, among others. To set up LLC, you to need to fulfill certain conditions, three of which include the following.

The first step you need to take for rental property business setup is company incorporation. In other words, it means that you need to register your company with Companies House. You will need to select a company name, have a proper address, appoint director(s) and a company secretary. These are the steps involved in incorporation of your company.

Next comes the registration part when you set up LLC. Once you have all the above in place, you can then register your company either directly or through a formation agent or third party software. If you opt to register directly, you can do it the regular way, i.e. through post or online.

Online registration costs are £12, registration through post costs £40 while same day registration through post costs £100. These are the costs payable, if the process is undertaken directly. When the registration process is concluded through a formation agent or by utilizing a third party software or platform, there will be additional costs.

The third step is the registration of the company for Corporation Tax. This is a time barred requirement, and needs to be concluded within three months of commencing business. Commencing business or being active means any form of activity that receives income, or that which will generate income.

This includes the earning of interest, or provision of services in any manner or activity geared towards the provision of services. You will need to register for Corporation Tax by activating the unique 10 digit UTR which is dispatched by post by the HMRC. It needs to be borne in mind that Corporation Tax is different from Value Added Tax.

These are the three steps required for establishing the LLC, for the purpose of tax computation and regulatory requirements. To get into operational mode, there are other aspects. You need to now transfer any existing properties into the LLC, if you are in possession of any.

If you are about to start, you can leave out this process. This entails a purchase of the property, implying that you will have to pay the required stamp duty costs, in addition to the exposure to capital gains arising out of the sale. Of course, you can exercise the option of recording the sale as a business, instead of an investment.

SIC Code and SPVs

The Standard Industrial Classification of Economic Activities or SIC Code represents the activity the business is involved in. This is required when making submissions or filing in the Companies House. An SPV, acronym for Special Purpose Vehicle is useful when looking for a mortgage.

Lenders are more open to offer mortgages for SPVs which are exclusively in the business of BTL properties, because they are less complex that other trading establishments which may be involved in many business activities.

There are many aspects that need to be borne in mind when you opt for a rental property business setup. In addition to the establishment of the LLC, you need to look at the taxation issues, and the transaction modalities. This calls for professional expertise and knowledge.

It is best to seek specialist advice prior to establishing an LLC, and to continue to use the services of specialists to avail of all legitimate tax exemptions, while ensuring that all practices are fully compliant. This will save considerable time and effort in sorting out issues that could have been avoided, while ensuring that finances are handled better, with better bottomlines.

About the Author: Sumit Agarwal
A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.