Holding Property through a 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, and this can go up to the additional rate of 45%.
What is a Limited Company in the UK?
When we talk about limited companies, it seems to be a company with limitations and a lack of freedom. However, a limited company with the โlimited liabilityโ status refers to an entity in its own right.ย It is important to stay updated and compliant with the latest tax legislation affecting a limited company. Having a specialised accountant for limited companies or an accounting firm dealing with limited company taxes would be a better option if you have a lot to deal with as a company director.
Potential costs when transferring the property to an LTD Company
There are a few additional costs that you may have to incur if you are considering transferring property to a limited company, including Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), Higher Mortgage Rates, and Legal fees for registration of the company. You can reduce or defer the capital gains tax through incorporation relief. Moreover, you may need to consider the mortgage conditions, as if the property being transferred to the limited company has a mortgage, you may incur early repayment fees.ย
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 individual’s or family’s circumstances.ย ย
However, the three key ways to hold a buy-to-let property are to keep it 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 a higher tax bracket than expected. Therefore, it would be a wise decision to use a reputable accounting services provider to calculate the liabilities and tax returns effectively and accurately.ย
What happens when you transfer property to a Limited Company?
If you are deliberating whether you should opt for transferring your property to an LTD, it would be best if you weighed all the pros and cons before you decide on transferring a buy-to-let property into a company. 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 expert tax accountants or 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.ย
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.ย
- The small profit rate (corporate tax rate) is 19% for companies with profits under ยฃ50,000, which is lower than the personal income tax. There are also no National Insurance charges on profits made through a company.ย
- For companies with profits between ยฃ50,000 and ยฃ250,000, the tapered or marginal rate will be applicable, while the main rate of 25% corporate tax will be applicable for companies with profits over ยฃ250,000.ย
- When you are paying corporation tax, you will no longer be subject to the recent mortgage interest relief restrictions.ย
- Additionally, the restrictions on the relief of finance costs will not apply anymore.ย
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.ย
- Even though the corporation tax is lower than the income tax, you may have to be liable for income tax on profit extraction from the company.ย
- Think about the capital gains tax implications; a transfer of property to a company is chargeable to Capital Gain Tax (CGT) at the deemed Market Value of the property. Even if you are gifting property to a limited company or transferring it at a lower value, it is chargeable to CGT. You may want to consider taking advantage ofย S162 Incorporation Relief,ย which is available for shares or a combination of shares and cash.ย
- 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 from paying any capital gains tax until you sell or dispose of the shares in the company.
There are numerous other conditions that you, as a landlord, need to meet before S162 can be applied.
Other Implications of Buy-to-Let Property
- Transfer of property from an individual to a limited company would be subject to Stamp Duty Land Tax if the value of the property is above a certain amount.
- Stamp duty on the transfer of property to a limited company 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 to an LTD can become time-consuming, complicated, and confusing.ย
- There can also be many tax traps that 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
- You are also liable to pay capital gains tax on buy-to-let at the time of selling the property.
Guide
Holding Buy To Let Property through a Limited Company
All You Need To Know
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 services, and the best implementation methodologies to make sure our clients save money and stay on the right side of HMRC.
FAQs
What are the tax benefits if I buy a property through a limited company?
Buying property through a limited company in the UK comes along with a lot of added benefits as well due to its tax implications. Because if you acquire property through a company, you will be charged corporation tax at the rate of 19% on the profits made through the property. So the benefits of buying a property through a company are more apparent when you are a higher rate taxpayer because a private landlord running a rental business would be paying 40% tax on their property income, while you would pay 19%. So, depending on the situation, buying property as a limited company might be very tax beneficial for you.
Do limited companies pay stamp duty?
Similar to an individual buying a property, if you decide to buy or are moving property to a limited company, you would be liable to pay stamp duty at a 3% surcharge on top of the normal rates.
Can a business buy a residential property?
No, as the term business may include all business structures. But can a company buy a house? Yes, it can! But there are a few costs involved. If you are buying a house through a limited company, you would be liable to pay SDLT at higher residential rates which depend upon the value of your property.
Can I sell a house to a company?
Similar to an individual owner, you can also sell a house to a limited company. But the buyer, i.e. the company will be liable to pay SDLT when purchasing the house at a surcharge rate. Also, note that you cannot sell the house at a discounted price to avoid stamp duty for your limited company as sale and purchase transactions and tax implications are to be considered. So the sale must be made at an open market price.
Additional Resources
