Should I Put My Buy To Let into a Limited Company?

20 October 2019
Darren Hughes
Estate Planning / IHT, Property Investors & Developers, Reducing Tax, Structuring a Business

We’re often asked whether to purchase a buy to let property personally or via a limited company, sometimes called a special purpose vehicle, due to the changes to mortgage interest relief restrictions and the additional stamp duty charges. Everyone’s circumstances are different and the pros and cons need to be weighed up on a case by case basis.

There are many things to consider when purchasing via a limited company, including:

  1. Length of property ownership
  2. Your personal taxable income
  3. Availability of your dividend allowance
  4. Stamp duty implications
  5. Capital gains tax if the property is already owned
  6. Early redemption charges if there is a mortgage on the property.

Below is an example of a recent client that we advised.

Case Study

Mr X contacted us about how to potentially reduce his £16,000 stamp duty cost. He was looking to potentially acquire a second property (Property B) to be his main residence with a view to renting out his existing main residence (Property A). Stamp duty for additional properties incur an extra 3% on top of the standard rate.

Mr X is currently a basic rate tax payer, although the rental income on his former home would push his total income into the higher rate bracket.

We advised Mr X that if he set up a limited company and transferred Property A to that company then Property B would not be subject to the additional 3% stamp duty rate, which in this case amounted to £16,000. (He would need to ensure that he did not have any interest in Property A on the date of exchange for Property B). Property A was previously Mr X’s own home that he lived in (also known as his principal private residence) and therefore would not be subject to capital gains tax when he transferred the property to the limited company.

By transferring Property A to a limited company he would incur stamp duty, but as Property A was not as expensive as Property B, then the overall stamp duty liability was significantly lower than the £16,000 he would have paid had he simply purchased property B  and left property A as personal.

There are plenty of benefits of Mr X transferring Property A to a limited company:

  1. The property will benefit from an increased market value base cost on a future sale
  2. The rental income will suffer lower corporation tax rates of 19% (reducing to 17%) when compared with income tax rates of up to 45%
  3. There will be full tax relief on the mortgage interest rather than the restrictions now being faced by individuals renting out property.
  4. As Mr X already owns the property its transfer to a company will create a loan account which he can draw out from the company tax free once profits are made.
  5. With careful tax planning using a combination of dividends and draw down of the loan Mr X should be able to take tax-free money from the company for many years to come.
  6. The company can also be used for inheritance tax planning in the future because it is a flexible and simple way of passing assets to the next generation in the form of shares. It could also be possible to set up share holdings at the start which give an immediate interest to family members.

On the negative side the finance costs would be slightly higher than a personal buy to let mortgage and there would be increased compliance fees running a company when compared with a rental business in your personal name. The other downside to corporate property ownership is that you do face a potential double tax charge if you sell the property and then extract the remaining capital funds. For that reason we do not recommend using a corporate vehicle if you intend to sell the property in the short term.

For Mr X however we calculated that he would save tax in the region of £2,000 per year on top of the stamp duty saving, so we have a very happy client!

If you would like more information on property taxation contact Darren in our tax department.

The content in this blog is correct as at 20/10/2019. See terms and conditions.

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