Recent changes in Government legislation have caused a buzz around buying properties under a limited company.
Changes in tax laws have meant that for a lot of landlords, buying under a limited company offers a much better investment solution.
That said, setting up a limited company isn’t necessarily the right choice for every landlord.
So how do you know if buying through a limited company is the right choice for you? Here we give you the pros and cons of making the switch.
- The most significant benefit is that rental profits under a limited company will be liable for corporation tax (20%) instead of being taxed as income (which can rise to 45%). That’s quite a substantial difference in the amount of tax to pay!
- Mortgage interest is an allowable expense for companies holding property. From April 2020, landlords will not be able to deduct mortgage costs from their rental income for tax purposes. Instead, they will be given a mortgage interest tax relief of 20%, which will reduce their tax liability, but not their taxable rental income. This could result in a landlord’s income falling in to a higher taxation bracket. If, including the mortgage interest, your taxable income is pushed into the next tax bracket, it might be worth considering a switch.
- Buying under a limited company can be a way to avoid a large amount of inheritance tax. Landlords planning on passing their portfolio down to children or family members could consider making them shareholders of the limited company, which is much more likely to benefit them in the future.
- Mortgages tend to be trickier to secure for limited companies. In general, the rates tend to be higher as well. However, lenders have recently picked up on the trend towards buying under a limited company, so this has the potential to change.
- There’s unfortunately still tax! Profit in the company would be subject to corporation tax (sticking at 20%) and not income tax, which can rise to 45%.
- If the landlord is intending to live on the rental income from their properties, the idea would be to distribute the company profit to themselves in the form of dividends. As of this year, the first £2000 in dividends is free of tax, and above this, the tax rate is less than income tax. If the intention is to let the profits sit in the company, then of course this issue isn’t something to be considered.
- Selling homes owned in the landlord’s name on to their limited company could result in quite a significant amount of capital gains tax and stamp duty.
- Landlords’ should also remember to factor in higher accountancy costs, business costs and a few extra piles of paperwork.
Q: I’m buying my first buy-to-let property, should I do this through a limited company?
A: If your current income is below the higher rate tax threshold, and when you add your rental income to this figure, this doesn’t push you up a tax bracket, the extra costs may not be worth the small saving.
However, you may wish to consider buying under a limited company if you are planning future purchases and expanding your portfolio.
Q: Should I transfer my current portfolio over to a limited company?
A: If you already own buy-to-let properties and are thinking about transferring them over to a limited company you’ve set up, this could be a bit of a pricey choice. Capital gains tax, stamp duty, plus legal fees, valuations and mortgage fees should all be considered as well as high accountancy fees.
Therefore, switching is going to be quite an expensive decision. Tax experts will likely advise not to transfer existing ownership to a limited company, but to buy future properties under the limited company instead.
Whatever your personal situation is, think carefully about whether the tax savings are worth it in the long run.
The best advice will always come from your accountant or a tax specialist, so it’s best to ask them whether buying under a limited company is the right choice for you.
Some useful articles and links are: