April 2020 saw the conclusion of the final round of adjustments to landlords’ income tax relief regulations, five years after they were initially announced. For many landlords, this implies that property ownership through a limited company is now much more advantageous; but, how can you transition from personal to limited company ownership? Muhammad Sufyan Moavia- Chartered Tax Adviser , discusses all you need to know.
Income tax relief adjustments have left many landlords in or near the higher income tax bracket substantially worse off. Since the announcement in the 2015 Summer Budget, both interests in limited company investment structures and lender availability of appropriate mortgages have grown significantly. However, for people who currently own buy to let property on their own, the process of “transferring” their portfolio to a limited company is not nearly as straightforward, as this article shows.
We always highly advise you to obtain expert tax counsel before beginning this process, since it is not always the most tax-efficient choice.
Transferring a Personal Rental Property to a Limited Company
The word “transfer” is rather inaccurate, as transferring your personally owned buy to let property to a limited company constitutes a sale and purchase transaction under the law. This implies that the procedure will incur the same additional costs and fees as any other real estate transaction, such as the following:
- Stamp Duty Land Tax
- Capital Gains Tax
- Conveyancing/Legal fees
- Early Redemption Charges (if applicable)
These increased fees prohibit some landlords from converting to a limited company investment structure. On the other hand, long-term savings may be sufficient to offset these early expenditures; it all depends on your circumstances. A knowledgeable tax expert can assist you in determining if this is beneficial to you or not.
Many landlords are already taking advantage of the stamp duty holiday, which is in effect until September 30, 2021. You may save up to £15,000 in tax depending on the value of the home; you can learn more about how to take advantage of the stamp duty break here.
“It’s my property; why can’t I sell it at a discount to my limited company?”
Regrettably, no. For tax reasons, a buy and sale transaction must occur at the open market value of the property. When the lender comes to appraise the property, they will do it similarly to how they would appraise any other property, which means you will be required to acquire it at full value.
What makes this procedure easier than acquiring a new home is that you may utilize the equity in the existing property as a deposit for your limited business. This is referred to as a director’s loan and it means that you will not be required to obtain a fresh deposit in order to acquire a limited company buy to let mortgage.
Stamp Duty Land Tax
Like acquisitions of personal name property, your limited company will have to pay tax on the land and the house surcharge 3 percent for an additional/ second property. Between 8 July 2020 and 30 September 2021, you can still enjoy a decrease in stamp duty (but not to acquire homes in Wales) although the surcharge continues to apply.
Stamp Duty Land Tax Calculator
Please visit residential property stamp calculator for additional information and to find out how much stamp duty you have to pay.
Capital Gains Tax and Limited Companies
Capital Gains Tax (CGT) law is complex. Historically, a transaction of this nature would have included you (the seller) being responsible for CGT under the normal standards. However, a landmark case* decided in 2013 that the landlord may seek incorporation relief under s162 of the Taxation and Chargeable Gains Act 1992, delaying any tax until the purchasing limited company sells the property.
The important aspect was, in this example, that the landlord and taxpayer spent 20 hours a week on different tasks: rent collection, property upkeep, garden maintenance, etc. The property was therefore judged to be a business/trade (eligible for incorporation relief) instead of an investment (ineligible for relief).
While no definite advice exists about the criteria that HMRC and the tax courts use in deciding whether the property is a business/trade or an investment, these are the generally recognized guidelines:
A property is an investment if:
- The landlord has paid full-time jobs that are not related to the property
- The landlord utilises a rental agent and administers the property
The property is a business if:
- The landlord picks own renters
- The landlord collects rent themselves
- The landlord undertakes minor maintenance work themselves
- The landlord can demonstrate that most of their income comes from the property/properties
Early Redemption Charges
If your mortgage on the property mentioned remains within the Early Reimbursement Fee (ERC) mortgage period, you will need to pay the charge. In general, it makes sense to wait until this time has expired before the process of incorporation starts; nonetheless, for many property owners, the present stamp holiday was a unique chance. In certain circumstances, the saving of stamping duties reduces the remaining costs, therefore our recommendation is to tell your broker whether this is a financially useful time to include. As always with property investments, your personal circumstances influence a lot.
What are the Benefits of Limited Company Property Investment?
The biggest advantage, which is increasing since the income tax reduction modifications, is the differences in taxes. Instead of paying income tax (with limitations on interest rate relief) on income on your rental portfolio, your limited company business pays corporate tax (currently 19 percent) on its earnings. This may make a big impact on individuals in or near the upper-income tax band, which is charged to 40 percent. The other great thing is that you are keeping more of your profits which can be used for further property investments to develop your portfolio easier.
Structures of limited companies also provide potential Inheritance Tax (IHT) and Capital Gains Tax (CGT) benefits since family members may be added as shareholders and directors . Keep reading for more information on Capital Gains Tax![M3]
Any investment, such as personal funds to be deposited in the limited company, can subsequently be repaid provided it is documented as a director’s lending. Profitable limited firms also provide you the possibility to withdraw dividends at lower tax rates. Speak to a competent tax advisor to see whether this is good for you.
Investing via a limited company often overlooked can also safeguard your personal credit score. If your tenants do not comply, you might be held liable as a landlord and your credit score can be damaged. When you invest through a limited company, the business name is not your own!
What are the Drawbacks of Limited Company Property Investment?
A special purpose vehicle (SPV) is the most popular (and easiest to administer) type of a limited company investment as most lenders agree to mortgage applications. The firm is limited in this respect to the purchase, lease, and sale of property alone; not necessarily a problem, but something that you have to be aware of.
Limited company investment might incur additional operating expenditures. For example, legal expenses are frequently greater in the purchase and refinancing processes as more effort is needed than investing in your own name. Moreover, unless you are prepared to generate your own annual company accounts, you will have to pay an accountant to do it for you.
Although the difference has narrowed somewhat over the past five years, mortgages for limited companies are attracting higher interest rates, largely because the loans have to undergo additional underwriting. In fact, stress testing is frequently less than for individual mortgages, which means your company does not need to have such high income to match the calculations of the lender’s affordability.
While it is crucial to get expert advice on mortgages before putting your purchase into your portfolio, we can give assistance on the tax side of investments by limited companies. If you have any queries or like to quote, please feel free to contact me on 0203 8080 999 or 0793 97874642, Muhammad | Moavia.
You can also contact [email protected] Conversely.