It’s becoming more and more popular for landlords in the UK to buy properties through limited companies, rather than ‘as individuals’. In this blog, we look at some of the main things to consider when anyone is deciding how to purchase their buy-to-let.
Is it really more tax efficient?
The short answer is: it depends. There’s lots of things to factor in: how many other properties you own, how you’d like to manage your rental income, how long you think you’ll own the property for… just to name a few.
A recent tax change – which means that individual landlords will soon have to pay more tax – could explain why more people are setting up companies to buy. But it’s not necessarily the best option for everyone.
Individual vs company: how do they compare?
How you’ll be taxed
If you buy your property as an individual, then your rental income will get taxed as personal income. You can claim some tax relief – but the amount you can claim is changing.
Prior to April 2017 any interest paid on a mortgage could be deducted from rental profits like any other business expense. Therefore mortgage interest payments of £10,000 would save tax at £2,000, £4,000 or £4,500 depending on what personal tax rate you paid. (20%, 40% or 45%).
But now, the government is phasing in some new rules. From April 2020, the interest relief has been restricted to the basic tax rate of 20% for all individuals. Therefore mortgage interest payments of £10,000 would save tax at £2,000 for all taxpayers. Obviously basic rate taxpayers are unaffected, but a higher rate taxpayer could be significantly worse off.
Buy to let Limited Company – Corporation tax
Conversely, rental profits on properties held in a limited company are not taxed according to personal Income Tax rates. Instead, they’re charged Corporation Tax which stands at 19% (2021 – 2022); it has no upper tiers unlike those for Income Tax.
However, the retained profits belong to the company. To extract the profits from the buy-to-let company to the individual, a salary or a dividend must be declared. Declaring either a salary or a dividend will likely incur taxes which will need to be paid personally.
Tip: Saving for retirement – A higher rate taxpayer could retain the money within the company, thus avoiding any large personal tax bills for now. Then when the individual’s main source of income ceases at retirement, the monies could be withdrawn at lower tax rates. For example a higher rate taxpayer would pay dividend tax at 32.5%, if withdraw now. Delaying the dividends until their income is reduced and providing that they were basic rate taxpayers, the dividend tax would be reduce to just 7.5%.
Selling your property
When a limited company sells a property, no Capital Gains Tax (CGT) Allowance is given. An individual who sells a buy-to-let receives a certain allowance – i.e. an amount they don’t pay CGT on. If a private landlord sold their property within the 2020 – 2021 tax year or the 2021 – 2022 tax year, they would receive an allowance of £12,300. A private landlord would pay CGT (either 18% or 28%, depending on your overall income) on anything above the allowance.
There is no CGT on buy-to-lets owned by limited companies. Instead, company is subject to Corporation Tax on any profit earned from selling a property. The profits earned by a limited company are the Sales proceeds, less the cost price, less indexation allowance. Indexation allowance is only available to limited companies. This simply increases the cost price to today’s prices, therefore taking into account inflation.
As an example a property purchased for £100,000 in December 1995 would have indexation allowance of £84,500. The taxable profits on any property sale would therefore be the sale proceeds less £184,500.
Phasing out of Indexation allowance
It was announced at the time of the Autumn 2017 Budget that the relief is to be frozen – the effect being that no relief will be available for inflationary gains arising on or after 1 January 2018. Where a property asset is disposed of on or after 1 January 2018, the indexation allowance will only be calculated up to December 2017. Where a property is acquired after December 2017, no indexation allowance will be available to mitigate any gain on disposal.
The freezing of indexation allowance will bring the position of companies more closely into line with that of individuals. Individuals have not received relief for inflationary gains since the ending of taper relief in April 2008.
Transfer personally owned properties into a limited company
Should you transfer properties which you already own into a buy to let limited Company? This requires careful tax planning as there are significant tax consequences.
The transfer from personal ownership to a limited company is deemed as a sale. The sale is deemed to have taken place at the properties current market value.
The individual will need to pay capital gains tax on the deemed proceeds. There may also be early repayment charges on any existing mortgages on the properties.
The limited company will need to pay stamp duty plus the 3% premium stamp duty tax. The company may also need to pay finance costs which are typically charged when taking out a new mortgage.
The initial cost of transferring the properties often outweighs the long term tax savings so detailed tax planning is a must. Typically we find that leaving the properties already owned personally is more beneficial, with only future property purchases going into a limited company.
What about the admin?
Setting up a buy-to-let mortgage inevitably means some paperwork, no matter how you choose to buy your property. But if you’re considering going down the company route, you’ll have a bit more on your plate.
To set up a company, you’ll have to register with Companies House and submit some paperwork (like articles of association). You’ll have to make sure you’re keeping the right accounting records – in some cases that means paying an accountant. And you’ll have to register for corporation tax, and submit a corporation tax return every year. (Of course, if you already have a company set up, you’re ready to go!)
Then if you want to pay yourself a salary from your company, you’ll have to register for PAYE, then deduct tax and national insurance and pay that to HMRC monthly.
So in a nutshell: it depends
Like most things in life, whether you buy as an individual landlord or a company, really depends both on – your circumstances, and on what you’re looking to get out of a buy-to-let.
Individual ownership is likely to be preferred:
- By Basic rate taxpayers
- When not affected by the restriction in mortgage relief
- A person owns just a small number of properties
- Only able to make small gains on disposals
- Rental income is needed for day to day living
The buy to let limited company route is likely to be preferred:
- By Higher rate taxpayers
- When a person is significantly affected by the restriction in mortgage relief
- Owns several properties and want to purchase even more
- Able to make large gains on each property disposal
- Rental income is not needed for day to day living
Always talk to your accountant or a professional to help you make the best choice for you. Articles like these can never give you the whole story – so don’t rely on them for advice! Taxes are a total maze and there’s a lot more to them than we’ve described here – and ultimately; it will always depend on your unique situation.
As a firm of Accountants, we deal with numerous clients who own properties both personally, and through buy to let limited companies. If you would like to discuss your individual circumstances with ourselves please contact us.