Most landlords are in agreement that buy-to-let is a business, but how many have considered entering the market as a business? Read about the pros and cons of setting up a limited company to invest in property.
There are many ways to invest in buy-to-let property. Many landlords choose to do so as private individuals, meaning that their name is on the deed and the rental contract, the rent goes directly to them and is subject to income tax.
It is possible, however, to set up a limited company to invest in property. Under this arrangement the company’s name goes on the documentation, whilst the landlord is named as a company director. Rental income goes into the company and is subject to corporation tax, rather than income tax.
Recent events might make this strategy more appealing to certain landlords, particularly those on higher tax bands. In his 8 July budget speech, Chancellor George Osborne announced that full tax relief for buy-to-let mortgage interest would be withdrawn over four years, starting in April 2017, and replaced with a 20% basic rate reduction 1. Experts suggest that, as a result, some landlords could pay more in tax than they make in profit 2.
Pros of incorporating a business
Corporation tax: Transferring one or more of your properties into a limited company, or ‘incorporating a business’, can have some tax advantages if planned carefully. Because companies pay corporation tax and not income tax, full finance relief can be applied and only profits are taxed. This means that tax goes up or down in line with net income.
Corporation tax rates are also being lowered during the same period that buy-to-let mortgage interest relief is being phased out. By 2020, corporation tax will be just 18% (down from 20% now) – compared to 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.
Interest rates are likely to be higher by 2020. Professional analysis suggests that a private investor with an £85,000 mortgage against a £100,000 property, paying 5% per month in interest and being taxed at the higher rate, would effectively pay more than 100% in tax. A company, meanwhile, could pay less than half of this amount. (Source: PwC 3.)
Dividends: When running a property business through a company, rental income goes to the company rather than the director. This means that you can take out as much or as little income as you need for yourself, and have more control over how it is taxed.
The tax treatment of dividends has changed slightly: the rates are being raised, and basic-rate taxpayers are no longer exempt. Taking money from your company also means that it is, in effect, taxed twice. However, it is still possible that this setup may be more efficient than paying income tax after the changeover.
Other taxes: Rental properties are excluded from the higher rate of stamp duty land tax (SDLT) imposed on incorporated property purchases worth £500,000 or more. This means that a property company benefits from the new progressive structure that has lowered SDLT payable for the majority of property purchasers.
Incorporation also makes change of ownership easier. By switching directors or transferring shares, you can effectively gift your property to someone without the owner (the company) changing, meaning that the transfer can be exempt from capital gains tax (CGT). Bear in mind that gifting assets in this way can still generate inheritance tax exposure, so be sure to seek advice from a qualified tax accountant.
Growing a portfolio: If you wish to use your profits to invest in more property and grow your portfolio, you can retain it within the company without having to pay income tax. Using a company structure, you can have as many or as few properties as you wish under a single corporate umbrella. This can reduce both administration and taxation costs and allow you to grow your portfolio more quickly.
Cons of incorporating a business
Financing: Though we might see this change in the future if limited companies become a more popular investment route, less than half of the buy-to-let lenders in the marketplace cater for corporate borrowers at present. This typically means that interest rates and product fees are likely to be higher than for private individuals borrowing under comparable circumstances.
Restrictions: Concordantly, lenders often impose a number of restrictions on limited company borrowers. In all cases, companies must be set up as special purpose vehicles (SPVs) which are solely for the purchase, sale, rental and/or management of real estate. Lenders frequently insist that directors are UK-based and are also company shareholders, and often underwrite directors and shareholders individually.
Tax: We’ve discussed several positives on the tax front, but there are negatives to counter it.
Because stamp duty land tax (SDLT) is payable when property is transferred to a company, properties purchased prior to incorporation may be subject to a double tax. This is also likely to be charged on the property’s full market value 4.
Also note that corporation tax is not subject to your personal allowance. Typically, the higher your personal income – both from property and elsewhere – the more tax-efficient borrowing as a limited company is likely to be.
Ultimately, whilst a company might give you more certainty as to how much tax you are paying each year, it may still not be the best option. Be sure to discuss your options with a qualified accountant or financial advisor before planning your next move.
- HM Treasury (2015) Summer Budget 2015. Available at gov.uk (Accessed: 17 Jul 2015)
- Haslett, E. “July Budget 2015 – changes to mortgage tax relief: Here’s what to do now if you’re a buy-to-let landlord”. City A.M. 8 Jul 2015
- White, A. “Buy-to-let: How landlords can cut their shock new tax bill”. The Telegraph. 10 Jul 2015.
- “Stamp duty land tax: transfer ownership of land or property”. HMRC. 13 Jan 2014.
This article is intended for information purposes only and should not be construed as providing investment advice.