Transferring Property to a Limited Company
Holding Property through Buy to Let Limited Company
Landlords have started thinking about transferring their buy-to-let property portfolio over to a limited company structure due to the recent announcement by the government. The announcement of restricting the tax relief on financing costs affects all buy-to-let residential landlords with finance costs. The effects of the implementation have been visible from 6 April 2017 onwards.
The other main reason for this transfer is the tax cap on the profits a company makes. As a company, you only pay a tax of a set percentage on your earnings. You do that regardless of the profit value in a company unless you take money out for personal use. As a sole trader, your income tax percentage depends on your income bracket; a high rate taxpayer pays up to 40% in taxes on their income, this can go up to the additional rate of 45%.
What is a Limited Company?
When we talk about limited companies, it seems to be a company with limitations and lack of freedom. However, a limited company with the ‘limited liability’ status refers to an entity in its own right.
A limited company uses a name that is unique and is not in the use of some other business. The name may end with Limited, Ltd, or the Welsh equivalents. Having a limited company business comes with its set of advantages.
A limited company gives an individual added security and protection if things go downhill. Limited liability means, assuming that no fraud or scam has taken place, that you will not be held responsible for any liabilities of financial losses made by the business, other than what you have put in the Limited Company.
A limited company may secure business investment and loans much easier than you because of its distinct entity status. Similarly, a limited company may benefit from tax advantages that can be maximised through professional help and consultations from a tax accountant.
The company ensures security for its employees as it will continue to exist despite having shareholders retired or resigned. If the principal shareholders of the company are the directors, it makes the decision-making process of the company less time consuming with a greater success rate.
However, there are few liabilities that come with having a limited company. Registering your company, staying compliant with the tax reforms are few of them. It is important to stay updated with new legislation and reforms in the industry. On a brighter note, you can hire a professional accountant or outsource to a property accountant from an established accounting firm near you.
Methods of holding Investment Property
There is an almost unlimited range of methods to hold a UK buy-to-let property and residential property. Each approach has its benefits and disadvantages depending on the circumstances of an individual or family.
However, the three key ways you may hold a buy-to-let property is to keep it individually in your name, through a limited company, or a trust. Each approach is slightly different in terms of liabilities and tax implications.
The annual tax during the ownership, also known as the annual tax on enveloped dwellings (ATED) is payable every year. Depending on the situation, you may find yourself unexpectedly in the higher tax bracket than expected. Therefore, it would be a wise decision to use the services of a reputable accountant to calculate the liabilities and tax returns effectively and accurately.
What happens when you transfer the property to LTD
If you are deliberating whether you should opt for transferring your property to an LTD, it would be best if you weighed all the pro’s and con’s before you decide to move your buy-to-let properties. The answer may depend on the circumstances; hence there are no right or wrong answers. However, it is advisable to have a second opinion from a professional business advisor. It is crucial as transferring the property to a company incurs major risk value and can be extremely high in costs.
Pros of moving your property to an LTD
- You will be filing a corporation tax return and paying corporation tax on profits rather than income tax.
- The corporation tax rate is 17% for the 2020/21 tax year that is lower than the personal income tax, there is also no National Insurance charges on profits made through a company.
- When you are paying corporation tax, you will no longer be subject to the recent mortgage interest relief restrictions.
- Additionally, the restrictions on the relief of finance costs will not apply anymore.
Cons of transferring property to a limited company
It may seem simple; however, holding a property through a limited company may qualify you for unexpected liabilities.
- Even though the paying corporation tax is lower than the income tax, you may have to be liable for income tax over profit extraction from the company.
- Think about the capital gains tax implications; a transfer of property is chargeable to Capital Gain Tax (CGT) at the deemed Market Value of the property. Even if the buy-to-let property is gifted or transferred at a lower value, it is chargeable to CGT. You might want to try and avail S162 Incorporation Relief which is available for shares or shares and cash.
Video: Capital Gains Tax
A capital gain is released when a capital asset is sold or exchanged at a price higher than its basis. Learn more about complexities and exemption in the video.
- The buy-to-let property held by a sole-trader or partnership needs to show that it was part of a business before you can get incorporation relief.
- Incorporation relief delays you paying any capital gains tax until you sell or dispose of the shares in the company.
There are numerous other conditions which you, as a landlord, need to meet before S162 can be applied.
Other Implications of Buy-to-Let Property
- Stamp Duty Land Tax is a tax which the company will have to pay if the property being transferred is over a specific value.
- SDLT is applicable if the value considered for SDLT is above a certain amount. The calculation of the charge is by reference to the market value of the property and not the consideration.
- ATED can also become applicable if you hold a buy-to-let residential property through a Limited Company which is higher than a specific value. You will need to check if you need to submit an ATED return.
- Transferring property from Sole or Partnership Landlord to a Limited company can become time-consuming, complicated and confusing.
- There can also be many tax traps which might be hard to avoid if you are not too sure about what you are doing or trying to do.
- Early Redemption charges might be payable on any existing mortgages
- Legal and Conveyancing Costs will also be payable by both parties
Assessing your costs to benefits and likely savings over the long term should be the first step. After which a good transfer planning strategy and a plan of action will add significant value in the long run.
Clear House Accountants are specialist Property Accountants in London who have years of experience working with Landlords, Developers, Property Management Companies and Estate Agents. We have developed smart strategies, tax solutions and the best implementation methodologies to make sure our clients save money and stay on the right side of HMRC.