Recent and ongoing changes with the way that buy-to-let property is taxed have caused many landlords to consider transferring ownership of their properties from themselves to limited companies. Every landlord and every landlord portfolio is different, so this is one taxation question that no universal answer works for everyone – this is something you definitely need help with, from an accountant.
In this article, the Maple Accounting team will explain how having your company own your buy-to-let properties could, possibly, result in the taxman taking a smaller share of your earnings but how there might be a big price to pay for that benefit.
What attracts landlords to using companies?
From the 6th of April 2017, mortgage interest relief restrictions have been implemented which have made the tax on buy-to-let investments rise significantly for higher rate taxpayers. Before this date, landlords paying higher (40%) and additional (45%) tax rates could claim income tax relief by deducting mortgage interest as an expense for their business.
From April 2020, tax relief on mortgage interest can only be claimed by landlords at 20%, regardless of their income. Companies are not affected by this restriction; instead, they are affected by corporation tax instead.
How does this affect corporation tax?
Because a limited company is a separate legal entity to its owner, the company is not affected by income tax. In its place, you will have to pay corporation tax (currently at 19%) on the profits earned by your company.
Additionally, you will be able to reclaim the mortgage interest because you can deduct the amount from profits thereby lowering your corporation tax.
How does this affect disposals?
When you sell a buy-to-let property, you will have to pay capital gains tax on the amount that you gain. For individuals, this amount is either 18% or 28% depending on whether you are in the basic rate or the additional rate tax brackets respectively.
Companies don’t have to pay capital gains tax because they pay corporation tax instead. One thing to consider is that once the corporation tax has been paid, the money left in your company is still not your money. The money belongs to the company and, to extract it, you will still need to pay either income tax or dividend taxes if you want to transfer the funds into your personal account.
For this reason, sometimes it is more efficient to own properties personally, rather than in a company.
- If the sale of one of your portfolio crystallised/made a capital gain of £30,000, after you subtract your capital gains allowance (currently £11,700) then you, as an individual at the basic rate, would only pay £3,294 in capital gains tax and somebody at a higher tax rate would pay £5,124.
- If the property belonged to a company, then it would pay 19% of the total £30,000 (assuming the company had made a big enough profit from other activities). That would generate a corporation tax liability of £5,700. So, in this case, it is better to own this property as an individual rather than through a limited company.
Transferring your personally-owned property to a company
You will have to pay taxes on any gains that you have made between the time of the purchase of the property and the date that you wish to transfer the ownership to your company.
Here is an example including property worth £175,000 being sold by a higher rate taxpayer:
If the property was bought for £175,000 initially, but its current market value is £250,000 then technically you have crystallised a gain of £75,000. On this gain, you will need to pay capital gains tax at 28% which would be £17,724 if you have your full CGT allowance available for the year or £21,000 if you had no CGT allowance left.
That’s not the end of it though. Your company will have to pay stamp duty on the purchase of £10,000.
This means you will have to spend a total of between £27,724 and £31,000 in order to transfer the property from your personal ownership to your company. This is only worth doing if you know you can save more than this through an efficient salary/dividend split – this is possible but may take decades to achieve.
Maple note – if the property you transfer from yourself to your company is worth more than £500,000, a 15% tax rate applies, generating a bill of a minimum of £30,000.
You need to consult about this.
This is a complicated area of tax and making the wrong decision could literally cost you tens of thousands of pounds, if not more.
Contact us today for support and advice by emailing firstname.lastname@example.org or call 01332 207 336 for our Derby office.