We often get asked the question, “should I buy a property through a Limited Company?” Unfortunately there is no simple answer and like lots of tax questions the answer is… it depends!
This article will cover some of the advantages and disadvantages of holding a residential Buy-to-Let property via a Limited Company.
You may hear some people talk about using an Special Purchase Vehicle (SPV). This is just a fancy name for a Limited Company where the articles may have been restricted to that of a rental property business.
We would always recommend you seek professional advice as there is no one-size fits all approach. Information in this article is also subject to change.
Ownership options of holding a Buy-to-Let property
There are various options to holding a buy-to-let property:
- As an Individual
- Joint ownership either as
- joint tenants or
- tenants in common
Only 4 people can hold the legal interest in property, although they can hold it on trust for themselves and others.
- A Partnership either as
- General Partnership
- Limited Partnership
- Limited Liability Partnership
More information on the types of Partnership can be found in another one of our articles Types of Partnership – General, Limited and Limited Liability (rppaccounts.co.uk)
- Within a Limited Company
Buy-to-Let Property Traditional Ownership
Traditionally most individuals would own a property in a personal capacity. This would be either by themselves or with another individual (a spouse or family member). However, over the years there have been an increase in taxes on individuals, reducing the appeal of personal ownership.
Some changes which have led to individuals considering their options include:
- April 2010 the abatement of the personal allowance for those earning over £100k
- January 2013 the introduction of the High Income Child Benefit Charge
- April 2016 the 3% surcharge on Residential properties for both 2nd homes and company purchases
- April 2017 the restriction of finance costs allowable against rental profit changed to a tax reducer
How has the Restriction of Finance Costs impacted Buy-to-Let Property Individuals?
Firstly if you are a basic rate taxpayer (approx. earnings of £50k or less) and have remained so after the changes to the restriction of the Finance Costs then you have not been impacted.
The introduction of the restriction of Finance Costs has created potential taxation issues:
- Negative cash flow due to the tax increase, including possible taxation on effective losses.
- Change in your marginal (highest) tax rate.
- Loss of child benefit from having an adjusted net income (ANI) in excess of £50k.
- Loss of personal allowance if your ANI breaches £100k.
- Reduction in savings allowance – e.g. if you had £1k of interest and went into the higher rates by £1, you would have an additional tax liability of £100 for that £1!
Those most impacted are those who are highly leveraged, as they now receive a 20% tax reducer, instead of finance costs being able to be deducted from the rental profits before being taxed, meaning potentially higher rate or additional rate tax relief was available. This means that the previous higher rate and additional rate tax relief has now disappeared.
Ways to mitigate your Tax liability whilst still owning a property as an individual
One way to reduce your tax charge and prevent the issues that can arise as an individual or through joint ownership is by adjusting the split of the ownership of a property.
When a married or civil partnership couple owns a property, one spouse may have a higher tax rate than the other. In this situation it may be wise to adjust the split of the property ownership, so that one spouse owns a percentage that would make use of their £1,000 property allowance and the other spouse owns the remainder.
It is important to note that the property ownership may need to change from Joint Tenants to Tenants in Common. Any unequal split between spouses needs notifying to HMRC within 60 days of the Ownership change. We have assisted many clients with this.
Using a Limited Company to reduce the tax burden
47,400 buy-to-let companies were set up in 2021 alone. This was the highest number on record.
However, is purchasing a property within a limited company a good idea? Many who will have set up a limited company ownership structure have probably not considered the disadvantages.
Advantages of a buy-to-let property in a limited company
Corporation tax rates are generally lower than income tax rates. The Corporation Tax rate is due to change from April 2023 where it will be:
|£50k or less||
|£50,001 to £250K||
|£250,000 or more||
|* effective marginal rate|
Also note that where you have associated companies the profit thresholds may reduce.
This compares to Income Tax rates of 40% for those earning over £50,270, 60% effective marginal rate between £100k and £125,140 and 45% for those earning over £150k.
This also means when you dispose of a property within a Limited Company the company will pay Capital Gains at the same Corporation Tax Rates, whereas the Capital Gains Tax rate is 18% and 28% for individuals after an Annual Exemption (22/23: £12,300), which a company does not get.
As mentioned a company has to pay Corporation Tax. If reasonable having a salary, pension or charging the company interest for any funds loaned to it can result in an effective profit extraction method. However, the costs must be reasonable and at the same level as what would be paid to an unconnected person.
You may be thinking how does this work?
A Salary – If say you had a salary, this would save the company Corporation Tax of 19% to 25% and the individual would incur income tax at either 20% (Basic Rate), 40% (Higher Rate) or 45% (Additional Rate). Note National Insurance has been ignored. This makes the effective tax rate using the 19% band of 1% (BR), 21% (HR) or 26% (AR).
A Pension – this would save the company Corporation Tax of 19% to 25% and then go into your pension scheme without any further tax – subject to the potential Pension Savings Charge issues.
A Director’s loan – as long as the company requires the money in order to finance its activities the interest charged will be allowable (as long as it is not excessive) for Corporation Tax purposes. Like a salary this will save Corporation Tax and will become taxable on the individual. However, if you are a basic rate taxpayer the first £1,000 of interest earned is tax free and there is a £500 threshold for higher rate taxpayers. There is some admin required with the completion of a CT61.
With the maximum Corporation Tax at least 15% lower than the higher rates an individual would be due to pay and 20% lower than an additional rate taxpayer, using a company can help retain wealth. This can be reinvested into additional properties or be retained to extract the profits at a later date when perhaps the individual is taxed at a lower rate.
When you introduce a property into a company, you are transferring a non-liquid asset (a property) in to a more liquid one (a loan). This means that any profits from the company can then be paid tax free to you to repay that loan made to the company.
In limited cases there can be an Inheritance Tax advantage where you may be eligible for Business Property Relief, however, in the vast majority of situations this is unlikely to be the case.
Stamp Duty Land Tax
Some people wish to start their rental business by renting out their 1st home and buying a new more expensive one. When they buy the new one they will incur the extra 3% Stamp Duty Land Tax Charge. However a way to reclaim the 3% suffered on the new property is to ensure you sell the old property into a Limited Company. This way you also retain the existing property, without all the extra hassles that surround finding a new property to buy.
Disadvantages of a company structure for a buy-to-let property
Higher Mortgage Costs
Generally mortgage interest rates and arrangement fees are higher, although we would recommend speaking with an experienced mortgage broker as the rates have become closer with the uptake of Special Purchase Vehicles.
Many people have rushed to buy properties in a limited company, as the Corporation Tax rates are lower than personal tax rates. Whilst that is correct, many have forgotten or do not realise it is the company’s money and not the individual’s. Therefore if you do not have a loan to be repaid back to you, you will be subjected to taxation on the extraction of the retained profits.
There is a dividend tax allowance each individual has of £2,000. After this a basic rate taxpayer pays 7.5%, a higher rate taxpayer 32.5% and an additional rate taxpayer 38.1%. These all increase by 1.25% for the Health and Social Care Levy from April 2022.
Ineligible for Business Asset Disposal Relief
When winding up a company if the assets are in excess of £25k you will need a formal liquidator. This generally costs at least a few thousand pounds and the letting of property is not an eligible trade for Business Asset Disposal Relief. This means most of any capital distribution may be at the higher Capital Gains Tax Rate of 20% after your Annual Exemption.
Note – Capital Gains Tax rates depend on your total income first. Any remaining amount below the higher rate tax threshold is at 10%. Anything in excess of this threshold is at 20%. Even though it is a rental company the extra 8% surcharge does not apply as you are disposing of shares.
Compliance and costs
Running a limited company is more costly than an individual completing a Self-Assessment tax return. There is also extra compliance that comes with it:
- Accounts filing to Companies House
- Accounts submission to HMRC, along with a CT600
- Confirmation Statements annually
- Dividend vouchers and minutes where necessary
- Depending on the property value ATED forms may need submitting
- If charging interest a CT61 needs to be completed on a quarterly basis with the tax deducted and paid.
More beneficial the more properties you have or a higher/additional rate taxpayer
It is more beneficial when you have more properties or are a higher or additional rate taxpayer. This means for a basic rate taxpayer looking to build a portfolio it can be more expensive to hold a property in a company at first. If you are incurring more cost this will eat away your cash and inhibit your ability to expand.
Transferring properties to a Corporate Structure
If you are not running a business – (the Ramsay case stated 20 hours a month are required to be running a property business) – then you cannot get incorporation relief. This means you may be subject to Capital Gains Tax, Stamp Duty Land Tax, Solicitor costs of the transfer, along with re-mortgage costs. For mortgages this can be more complex where there are different introductory rates.
Should you buy a Buy-to-Let property in a Limited Company?
As you can see there are lots of things to consider and it does depend on your own circumstances. Generally if you intend on keeping the property for a long time and are a higher or additional rate taxpayer it may be more beneficial to adopt a Limited Company. However, as it does depend on a number of factors you should always seek professional advice.
This article does not cover everything you need to be aware of. If you require any assistance or further information regarding whether you should considering buying a Buy-to-Let property in a Limited Company please contact us. A member of our team will be happy to help.