Buy to let property through a limited company

If you own an additional or numerous buy to let properties, you need to decide if you retain these as personally owned properties or buy and retain them via a limited company. If you are a property investor, it’s worth owning and renting your property portfolio via a limited company or multiple companies as it can be very advantageous.

Owning property via a limited company can bring tax benefits because you pay corporation tax rather than income tax on rental income earnt from the property. There may be other benefits including tax relief on mortgage interest, the ability to claim allowable expenses and limited legal liability.

In this blog we will look at the advantages and disadvantages of owning buy to let property through a limited company and considerations if you are transferring property into a limited company.

Advantages of owning buy to let property through a limited company

Corporation tax and personal income tax

Tax savings can be made via limited companies compared with owning buy to let property personally. This is because you will be paying corporation tax on any rental profits from the property in a limited company. If you own a buy to let property personally, you will have to pay income tax on rental income. Corporation tax rates can be lower than paying income tax (depending on your total income).

The corporation tax rate currently ranges from 19% - 25% (dependent on profits). Rates for personal income tax are dependent on your income tax band. Income tax rates are: 20% for a basic rate taxpayer, 40% for a higher rate taxpayer and 45% for an additional rate taxpayer.

There may also be personal tax savings if you undertake tax-efficient profit extraction from the limited company vs personal ownership and the income tax you pay as a sole trader.

You could add family members (ss non-executive directors or shareholders) to your limited company, and this may give you additional tax benefits and savings on income tax via their tax-free allowance, lower tax thresholds and by drawing dividends from the limited company.

As a company director, you also have the flexibility to choose what to do with the profits. You can invest in further properties, save into a tax-efficient pension or pay out the profit strategically using dividends. This flexibility can help with your personal tax planning compared to personally owning properties and paying income tax on the rental income earnt.

Allowable expenses & mortgage interest

Owning investment property via a limited company will allow you to deduct allowable expenses and mortgage interest from your rental income to reduce the amount of profit and, thereby, the amount of corporation tax you pay.

Allowable business expenses reduce the amount of tax you need to pay HM Revenue and Customs (HMRC).

Landlords that rent out personally owned rental properties can no longer directly deduct any mortgage interest payments from their rental income to reduce their tax bill. Instead, this is done by giving the individual a 20% tax reducer meaning that higher rate and additional rate taxpayers miss out on further tax reductions.

However, the benefit of owning buy to let property as a limited company is that you can deduct mortgage interest from rental income so, this remains a large incentive to many people now to own or transfer investment property into a limited company.

Note: If there is an existing mortgage on a property, then some mortgage lenders may not allow you to move the property into a limited company. You may have to switch mortgages and you may find your finance costs are higher. Seek advice from your mortgage lenders first before moving property into a limited company.

Inheritance tax (IHT)

Another area of tax efficiency when owning buy to let properties in a limited company is inheritance tax.

If you plan to pass your business on to your family in the future, it can be simpler and cheaper to transfer a limited company or shares, than a privately held property. In this circumstance, as the property remains owned by the company, it could also be protected from stamp duty land tax (SDLT), inheritance tax and capital gains tax liabilities.

For IHT purposes, your estate owns the shares in the limited company, and the value of those shares reflects the value of the properties owned by the company. However, the use of tailored types of shares may offer long-term IHT protection for future growth in the value of the properties. This could be achieved by setting up a Family Investment Company or via loans and director’s loan accounts, which could also be used to reduce IHT exposure. Seek professional tax advice before taking any action.

Limited liability

Your legal and financial liability is minimised with a limited company if there are legal issues or financial losses within the company (unless you have given personal guarantees for borrowing).

Setting up a limited company provides legal separation between individuals and the business, as the owner of a limited company, you are not responsible for company liabilities. With a limited company, you are not obliged to use your own funds to pay off debt, giving you more protection and limiting your legal liability.

Better for growing portfolios

For property investors planning to expand their buy to let property portfolio, there are potential tax savings using a limited company. In a property company, you can retain your profits within the company to fund future purchases without them being subject to income tax (until you decide to draw the profits out of the company). Retaining earnings within the company helps to protect them from tax liabilities, giving you the opportunity to repay debt and/or expand your property portfolio faster.

Disadvantages of owning buy to let property through a limited company

More cost for basic rate taxpayers

If you’re a basic rate taxpayer with only one to two properties, the costs of running a limited company may outweigh the benefits. However, if your other earnings increase, or your profits on your rental property increase, you may find that you cross the threshold from basic rate taxpayer to a higher rate taxpayer. If your overall earnings are increasing, you might want to consider transferring property into a limited company.

Mortgage costs

Your mortgage costs may be higher when using a limited company as you are likely not to be able to take out a personal mortgage, you will need commercial mortgages to own property via a limited company. Finance costs of commercial mortgages and buy-to-let mortgages tend to be more expensive due to higher rates of interest.

Other costs

You will need to consider that there will be additional costs involved when running a limited company, such as legal and accountancy fees for preparing annual accounts and completing personal and corporation tax returns etc. However, tax savings often outweigh these additional costs, so it is worth working with an accountant such as dns to calculate the costs and savings for your own personal circumstances.

Legal and compliance responsibilities

There are additional legal and financial compliance responsibilities with property ownership via limited companies’ vs sole traders. As a director of a company, you are legally required to keep accurate company and financial records and submit annual accounts and returns to Companies House and HMRC.

Capital gains tax allowance

If you sell a rental property personally, you’ll need to pay capital gains tax, but you do get a tax-free allowance. You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance is currently £6,000.

If a limited company sells a property you don’t get this tax-free allowance, but the rate of tax could be lower. This is because limited companies pay corporation tax on gains of between 19%-25%, whereas if you’re a higher or additional rate taxpayer, you’ll pay 28% capital gains tax on your gains from sale of residential property.

Seek professional advice

Tax on property can be complex as you need to consider tax when purchasing a property, tax on rental income and tax when you sell property.

Often increased costs can be offset by the increased tax efficiency available throughout the rental lifetime of the property, and for higher rate taxpayers, the tax rate paid through a company could be lower.

The tax implications of owning buy to let property are complicated and your tax bill and personal liability will be dependent on your personal circumstances. So, you should seek professional tax advice from accountants such as dns accountants before making any decisions to understand the tax liability to you personally or the company.

Transferring property into a limited company

Incorporation relief and capital gains tax

There could be savings in capital gains tax when you transfer buy to let property from personal ownership into a limited company. This is because you can receive shares in that company in exchange for the properties. Capital gains tax is not triggered at this point because the new shares in the company have a reduced base cost for tax purposes, equivalent to the original cost of the properties. However, future disposal of those shares could trigger capital gains tax based on the value at the point of disposal.

If you own a property portfolio, you may benefit from incorporation relief when transferring your portfolio into a limited company. However, this relief is only available to ’property businesses’ and not to those who only own property investments and work elsewhere.

HMRC generally accepts that a ’property business’ exists where a person works 20 hours a week or more on the properties. The property portfolio should contain a sufficient number of properties to justify the time spent working in the property business. The whole property business must be incorporated as a going concern to qualify for the relief. This relief means you will not pay any tax until you sell (or ‘ dispose of ’) the shares.

To qualify for Incorporation Relief, you must:

• be a sole trader or in a business partnership
• transfer the business and all its assets (except cash) in return for shares in the company

The company would acquire the properties at their current value, and if the company disposed of the properties, it would be taxed on the growth in the value of the property since the transfer (not the growth prior to the company).

Stamp Duty Land Tax (SDLT)

There will be an initial financial outlay to consider when transferring property from personal ownership to ownership via a limited company. This is because you may pay Stamp Duty Land Tax (SDLT) based on the open market value of the property at the point of transfer.

Additionally, the company may have to pay the 3% surcharge applicable to residential properties. In cases where an individual is buying a second home and wants to retain their current home for rental purposes a transfer into a limited company could be beneficial. If the current residence is transferred to a limited company before purchasing the new home, the transaction will not be subject to the 3% higher rate applicable to the purchase of second residential properties.

If the current home is transferred to a limited company within 3 years of purchasing the new home, the 3% surcharge paid on the new property can be claimed back from HMRC.

Summary

Buying and renting investment property can often be more tax efficient through a limited company but this will depend on your how many properties you own, your future plans, your overall personal income and your own circumstances to determine how much tax you’ll save and pay.

There are several tax considerations when buying, owning or transferring property or properties to a limited company.

• Corporation tax
• Income tax
• Stamp duty land tax (SDLT)
• Capital gains tax (CGT)
• Inheritance tax (IHT)

Here at dns we have a large team of accountants and tax advisers that specialise in the landlord and buy to let market and we can offer you bespoke help and advice and advise you on the best way to own and rent buy to let properties. Contact dns on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk. today to find out more about

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