Should you set up an HMO business as a limited company or a sole trader?

Hello readers. The Property Vault Medway is TONIGHT (January 24th) so don’t forget to book your tickets at We have a great speaker, Georgina Burnett, who will be talking about refurbishments, buy-to-flips and interior design. I’m looking forward to seeing many of you there.

I am often asked what type of company you should set up to run HMOs and if they are still a good investment – especially as lots of changes have occurred in legislation and tax. I thought therefore I would take a look in this blog post.

HMO vs buy to let yields

Firstly, let’s consider the type of yields you might expect before setting up your business.

HMOs are usually a popular choice among tenants and landlords. For tenants, the rent is often more affordable and provides a flexible living option. On the other hand for landlords, gross yields are generally far higher than can be generated by standard buy to let property.

Below you can see a comparison of yields for HMOs and ‘vanilla’ buy to lets (BTLs) from the Complex Buy to Let Index produced by Mortgage for Business.

This clearly shows that HMOs offer far higher yields than standard BTL properties. Although both offer good returns compared to other forms of investment such as ISAs and bonds, in 2016 the average HMO yields were 70% higher than the average vanilla BTL yield.

Limited company or sole trader

So should you operate your HMO as a sole trader or a limited company?

I am sure you are aware of the difference between a sole trader and limited company.

As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them. A limited company is an organisation that you can set up to run your business; it’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits. Therefore tax is calculated in different ways and the amount of tax saved by running a business via a company depends on many variables.

A massive advantage for Ltd companies is that they will continue to be able to claim mortgage interest relief, whereas sole traders will not. HMRC says changes mean sole traders will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

Landlords will be able to obtain relief as follows:

  • in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
  • in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
  • in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
  • from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction

The changes will affect you if you let residential properties as an individual, or in a partnership or trust, as well as how you receive relief for interest and other finance costs and be gradually introduced over four years from April 2017.

Finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this will be the basic rate value of the finance costs.

You’ll be affected if you’re a:

  • UK resident individual that lets residential properties in the UK or overseas
  • non-UK resident individual that lets residential properties in the UK
  • individual who let such properties in partnership
  • trustee or beneficiary of trusts liable for Income Tax on the property profits

All residential landlords with finance costs will be affected, but only some will pay more tax. You won’t be affected by the introduction of the finance cost restriction if you’re a:

  • UK resident company
  • non-UK resident company
  • landlord of Furnished Holiday Lettings (FHL)

You’ll continue to receive relief for interest and other finance costs in the usual way.


HMRC is also currently consulting on a new requirement that all sole traders and landlords with income above a certain level should maintain their accounts digitally. Sole traders are mandated to prepare and report their accounts online from 2018.

Since 5th April 2015 Class 2 NICs are assessed annually together with income tax and Class 4 NICs. It is anticipated that Class 2 NICs will be abolished this year.

The government announced that tax relief on buy to let mortgage interest payments would be slashed in April 2017 and that buy-to-let properties would incur an extra 3 per cent stamp duty. Before, people with a buy to let property have been able to claim tax relief on their mortgage interest payment at their marginal rate of tax.

This means that a basic rate taxpayer would get 20 per cent tax relief, but those at higher rate would receive 40 per cent relief, while top-rate taxpayers could claim 45 per cent.

After April 2017, tax relief will be a flat rate of 20 per cent, whereas landlords paying basic rate tax would see no change, but those on higher incomes will lose more in mortgage interest payments. A further change is that buy to let properties and second homes would be subject to stamp duty at 3 per cent regardless of value.

According to the Nationwide Building Society, someone with a £150,000 buy to let mortgage on a property worth £200,000 with a monthly rent of £800 would have a net profit of around £2,160 a year. Under the new system, the net profit would go down to £960. Clearly you will make more from a HMO but this will also realise a slightly smaller profit.

In order to save more on a mortgage, switching to a shorter-term fixed rate deals to get lower rates of interest can be an option, although these type of mortgages carry more risk.

What do accountants say?

As part of my research I spoke to Naz Khaliq from Canterbury-based Dynamix Accountancy. He said that their advice is if you are running BTLs as a sole trader, you need to consider moving to HMOs first before starting up as a limited company.

Making the change as a sole trader to Ltd from BTLs means you will have to pay additional tax. However, if you make the change with HMOs, then they can realise tax savings such as in Capital Gains tax; that can’t happen with BTLs.

With that in mind, I recommend that you should speak to an accountant with property tax experience, in the first instance, to get the best advice before embarking on any changes.

Taking all the information into account, the most viable solution is to place the property portfolio in a limited company structure as corporate tax is lower and profits should be higher than running the business as a Sole Trader. Ultimately though it is up to you what route you would prefer to take.


Feel free to follow me on LinkedIn, and don’t forget to subscribe to the Medway Property News Blog. I am always happy to hear your thoughts. You can contact me through the Home-Share Facebook page, via my email, or ring me on 07944 726 676.


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