As a landlord, you are running a small business, and although it may differ in many respects from service-based small businesses like plumbing and construction, the fundamental elements are the same. This is especially the case when it comes to tax, accounting and meeting your legal requirements.
Any small business has the choice of whether to operate as a sole trader, a limited company or under the auspices of an umbrella company. Setting up as a limited company is not really a practical option for most landlords due to the complicated structuring and accounting responsibilities. Unless your properties are earning you in excess of £25000 per year, it is probably not worth going down this route.
Declaring yourself a sole trader is the simplest option. In this case you take all responsibility for your business, and you need to take care of your own accounting and taxes. You get all the profits from your business, but you also have to bear all the losses and running costs. Most seriously, should your business get into difficulty, the law won't distinguish between your personal and business assets. This means that if you have major debts you cannot pay you could stand to lose not only your buy-to-let properties but your own home as well.
Finally, sole traders are sometimes seen as less securely established than structured companies, meaning that lenders and investors are more cautious about working with them.
Using an umbrella
This leaves the final choice of joining an umbrella company. These institutions essentially act as your employer for tax and accountancy purposes. Although you are still running your own business, they will process your rent collection, take care of your accounts, file tax returns and pay all necessary taxes, including National Insurance, on your behalf in return for a small fee.
Although you surrender a portion of your profits, a reputable umbrella company like atlantic-umbrella.com can save you the cost of employing an accountant as well as the risk of accidentally failing to declare all of your income or not paying the correct amount of tax.
There are also often many tax advantages to working under an umbrella company. The 2015 summer budget saw new tax rules introduced for landlords that will take effect in April 2017. Currently landlords can claim tax relief on the interest on their mortgage repayments at the highest preferential rates.
Under the new rules you will only be able to claim basic tax relief at 20%, bringing landlords into line with the rules for other residential properties. Obviously, however, this will increase costs for landlords unless they own their buy-to-let properties outright. But if you buy your property through an umbrella company, you may be able to ring fence your investment so that it won't be affected by the new rules, potentially saving thousands of pounds.
Increasingly using an umbrella company is often the best option for many landlords. Not only do umbrella companies free you up from the burden of bookkeeping and staying on top of ongoing changes in taxation and self-employment rules, but they can also provide numerous tax advantages in an increasingly competitive market.