Rackhams Accountants Tax Guide for Property Owners
Part 2: Setting up a limited company for owning rental property
Indeed, owning property as an individual makes sense if you only have one rental property and a relatively small rental income. Not least because managing your tax liabilities through your self-assessment tax return is likely to be the simplest and most flexible option.
In part 1 of our guide, we explored the tax implications of buying, owning and letting rental property as a private individual.
https://www.rackhamsaccountants.co.uk/2022/03/02/what-private-landlords-need-to-know-about-tax/
The situation is very different should you decide to expand your portfolio or start a full-scale property management business. It will be advisable to look carefully at the potential advantages of owning rental property through a limited company in those circumstances.
Potential tax advantages
There are significantly different tax implications for owning property as a limited company. These differences offer potential tax advantages, pitfalls and restrictions, and a lot more red tape!
Suppose you are considering setting up a limited company for owning and letting property. In that case, you must take professional advice, either from a tax specialist, your accountant or a suitably qualified financial adviser.
Transferring ownership?
You’ll ‘transfer’ ownership from you as an individual to the limited company if you already own investment property. However, ‘transfer’ is a misleading term. You are actually selling each property that the limited company then purchases.
You need to know that this can incur considerable costs, including:
Stamp duty: The company must pay stamp duty charged at the current residential rates (up to 5% of the purchase price), plus an additional homes charge of up to 5%. For example, the combined fee on the sale of a £200,000 property is £9,000 in duties at current rates.
Capital gains tax: If the property you are selling has increased in market value since you originally bought it, you will also be liable for capital gains tax of 18% of the gain for basic taxpayers and 28% for higher rate taxpayers.
Redemption fees: You may also be liable for an early redemption fee on your existing personal buy-to-let mortgage.
Arrangement fees: The company that arranges a limited company buy-to-let mortgage may charge fees. Also, this type of financing is more scarce than personal buy-to-let mortgages and, therefore, may be more expensive and have a higher interest rate.
Legal fees: transferring ownership will incur legal fees, including land registry fees.
That can all add up to a hefty bill, so it’s time to look at the potential savings and benefits of incorporating.
Different tax treatments for a limited company
HMRC has changed its stance on tax relief on rental income. Mortgage interest used to be deductible from rental income for tax purposes, but not anymore.
This is especially bad news for higher rate taxpayers.
However, a company does not pay income tax on rental income; it pays corporation tax on profits. Corporation tax is currently 19%, significantly lower than 40% higher rate income tax. Also, a business can deduct mortgage finance costs as a legitimate business expense.
A company director may take income from the profits as dividends. However, dividends still carry a tax liability, and the corporation tax element still applies. So higher rate taxpayers will have to look carefully at which option is the more cost-effective; income tax as a private individual or the divined/corporation tax route as a company director?
Being a limited company director delivers lots of responsibilities and inevitable red tape.
You will need to:
- Maintain company records
- Prepare and file articles of association
- Register with companies’ house
- File an annual tax return for Companies House
- File an annual tax return for corporation tax purposes
- Nominate and maintain records of the registered company address.
As a limited company director, your personal assets, such as the family home, won’t be at risk if the company gets into trouble. But, again, this is in direct contrast to being a sole trader.
Selling property as a limited company
You may want to sell a rental property to rationalise your portfolio, take property into personal ownership for personal use, or to removing the assets from a company structure.
Just as when you buy a property as a company, there are costs associated with selling property as a company, including stamp duty.
If you decide to sell a rental property, the sale proceeds stay in the company.
Companies don’t pay capital gains tax, but you will still pay tax on any profit.
Company directors can access the sale proceeds as dividends, which will be taxed. Note: [It’s much easier to sell as an individual. You pay capital gains tax on the profit but can access the proceeds tax-free].
There may be inheritance tax issues to consider too, but this is a whole topic on its own!
Non-residents, UK limited companies and rental property
If you’re based overseas and are looking to buy UK property, this adds another dimension.
There’s an additional 2% stamp duty surcharge for non-residents, and you may find it harder to find a UK lender willing to offer a competitive mortgage interest rate.
A lot to weigh up
There’s a lot to consider and think about. Decisions this big need the care and guidance of qualified professionals. Most of the additional work is routine to the likes of mortgage brokers, solicitors and accountants who deal with the relevant authorities day-in, day-out.
Rackhams Accountants helps many other landlords make the right decisions for them and is always happy to chat about the pros and cons if you’re considering the limited company route. Call 01482 631700 to book your free, no-obligation business start-up consultation.
The information in this article was correct at the time of publication.
