A limited company structure can be incredibly beneficial for buy-to-let investors. It could potentially lower your annual tax bill, provide significant funds for reinvestment, and make it easier to transfer property to your children. However, it can be costly to transfer ownership of existing personally-held properties to a limited company due to capital gains tax and potential Stamp Duty Land Tax. Additionally, there is significantly more responsibility associated with owning a limited company, as opposed to reporting rental income via Self Assessment.
If you are considering setting up a private limited company and have yet to purchase a buy-to-let property, or you are planning to add more to your existing portfolio, it is advisable to form a company beforehand and buy these future investment properties through the company.
The most significant benefit of purchasing and holding properties through a company is tax efficiency. Your rental profits will be subject to 20% Corporation Tax if they are below £300,000/year. Conversely, if you own buy-to-let properties in your own name, profits from rental income will be taxed at your personal tax rate, which could be as high as 45% when added to your other sources of income.
Rather than removing profits as personal income, which would be subject to Income Tax and take you into a higher personal tax bracket, owning property through a company will allow you to reinvest more cash in new properties or upgrade existing properties to increase their short-term and long-term value.
If and when you decide to sell a property that is held through your company, the capital gain will be charged at the standard 20% rate of Corporation Tax. However, if you sell a property that is held in your own name, any capital gain will be taxed at 18% or 28% (or a combination of the two), depending on your taxable annual income
Changes to dividend tax rules came into effect in April 2016. If you set up a limited by shares company, you can take up to £5,000 tax-free dividend income. The same profits from personally held properties, on the other hand, would be subject to 20-45% Income Tax.
During the Summer 2015 Budget, it was announced that landlords could no longer deduct their mortgage interest when working out their rental profits. Between 2017 and 2020, mortgage interest tax relief for landlords will be gradually reduced from 45% to 20%.
These changes will not affect you if you own property through a limited company. However, if you transfer an existing buy-to-let property from yourself to a company, HMRC will treat it as a sale and you could have significant capital gains tax to pay. Furthermore, there may be limited mortgage options because there are fewer home loan options for companies
Owning property through a limited company can make it easier to pass on ownership to your children or partner – you simply transfer ownership of the company shares. It is not as easy or tax-efficient to transfer personally held properties to other people because any transfer will be considered a disposal for capital gains, and sometimes inheritance tax. You will also face a potential Stamp Duty Land Tax charge for the transfer of any property worth more than £125,000.
The same issues are true is you were to transfer ownership of personally held property to a new company. If you are an existing landlord, the best option would be to retain your current properties in your own name and purchase future properties through a limited company.
If you are considering investing in a buy-to-let property and/or setting up a limited company, it is important to seek impartial, professional advice beforehand. An accountant will be able to discuss the most favourable and valuable option for your personal circumstances and long-term plans.
For sales and lettings in Glasgow and beyond, contact our friendly Vanilla Square team. Whether selling or letting property, you will always be liaising with one of our business partners, which makes our service that much more responsible and approachable. When you instruct us, your property will reach a wider audience as we are one of the few agents who are present on all the major property portals to offer sellers and landlords maximum exposure. If you’re looking to buy, sell, rent or lease your property, or you’re simply considering the idea, contact us by calling 0141 229 0210 or pop into our new office at 711 Great Western Road. One of our partners will be delighted to help and provide you with impartial, expert advice.