Using A Limited Company To Buy Residential Property

simon

Simon Misiewicz

30th June 2020

Questions you may have about using a limited company? Buy to let company or not?

As property tax specialists we often see questions as you will see below. The question always arises about a buy to let limited company.

We will attempt to answer the below questions in this very article

– Can a limited company buy a residential property?

– How to start a limited company?

– What is a property company?

– What are the benefits of using a limited company to purchase buy to let properties?

– What are the disadvantages of using a limited company as a UK landlord?

A step by step in deciding what structure to purchase a buy to let property

It is important to decide how to purchase a buy to let property, be it, in your personal name or a limited company. We would suggest that you:

1 – Look at your current tax position of you and your spouse/civil partner

2 – Review what the financial income and tax position of your and your spouse/civil partner will be in the next five years

3 – Work out the tax savings of one structure to another against the buy to let mortgage interest costs of such an implementation. You ought to think about the additional costs of using a limited company such as bookkeeping and limited company accountancy services.

4 – If you are keen to leave your employment job in the next five years then it might be better to buy the property in your own name

5 – A limited company may be better for you if you and/or your spouse/civil partner will remain as a high rate taxpayer because of work or business activities and you do not need the money from your property investments.

What are the basics of Private Limited Company Examples?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that choosing the right property tax structure is an important decision for our clients to make.

Private sector businesses account for 35% of the UK’s businesses, with over one million in London alone.

More than four million Limited Companies are registered in the UK with over 500,000 new companies being incorporated annually.

A Private Limited Company is simply a Limited Company.

Private Limited Companies can also be called PLC. This is not to be confused with Public Liability Company (PLC).

There are different types of Limited Companies, including Limited Liability Partnership (LLP) and Special Purpose Vehicle (SPV).

Limited Companies pay Corporation Tax on their profits at 19%, which is set to increase up to 25% from 2023.

Corporation Tax is paid on total profits, minus allowable business expenses.

Limited Companies do not pay income tax or national insurance and are a separate entity from the owners, directors and shareholders.

In the UK, all Limited Companies must be registered at Companies House, and the information about Limited Companies is held on a public register available for anyone to see.
There are no restrictions on who may use a Private Limited Company business structure.

Limited Companies in the UK can include hairdressers, cafes, restaurants, manufacturers, and of course, property-related activities such as property investments and property developers.

There is helpful Government advice on running a Limited Company that is worth reviewing.

What is the difference between a sole trader and a Private Limited Company?

You must set up as a sole trader if you earned more than £1,000 during the previous tax year. It would be best if you told the HMRC that you pay tax through self-assessment.

self-assessment tax return will need to be filed annually, and you will need to register for self-assessment with HMRC to do this.

As a sole trader, you can keep all of the business’s profits after you’ve paid tax on them. You are also personally responsible for any business losses you make.

A sole trader business in the UK must keep records of sales and expenses and send a self-assessment tax return every year.

Sole Trader taxation involves submitting a self-assessment tax return every year. Each tax year ends on 5th April, with payment being due to HMRC by 31st January the following year.

Higher tax bands are applied depending on how much money a sole trader makes with tax due on taxable income.

A sole trader will also need to consider if they need to make a payment on account, whereby they pay an additional 50% of their tax due simultaneously as they pay their previous tax bill on 31st January.

Sole traders must pay income tax on profits and also Class 2 and Class 4 National Insurance contributions.

A sole trader business cannot include ‘limited’ ‘ltd’ ‘limited liability partnership’ ‘public limited company or ‘plc’ in the business name.

A sole trader business name cannot be the same as an existing trademark and should not suggest a connection with government or local authorities unless permission is given.

The biggest difference between a sole trader and a Private Limited Company is that a Limited Company has a special status in the eyes of the law.

Part of a Limited Company’s definition is its incorporation.

It is formally set up and registered at Companies House. Shares are issued to its shareholders.

Why do people use a limited company?

There are many reasons why people use a limited company as a buy to let property investors. One of the reasons is to do with tax. A limited company has a corporation tax rate of 19%. The 19% rate is much lower than the 40% income tax rate for high rate taxpayers. It is also much lower than the 45% income tax rate for additional rate taxpayers.

The other reason for UK landlords to use a limited company is to minimise risk. If there is a legal case against you as a sole proprietor,  then your personal assets could be at risk if found guilty and have to pay out large sums of money to the claimant.

A limited company that is prosecuted does run the risk of its assets being taken away. However, the shareholder of the company can relax in the fact that their personal assets are not at risk. This is provided that they have not signed a personal guarantee.

Tax benefits of using a limited compared to the additional mortgage interest

Buying a residential property in your limited company may save you tax. What about mortgage interest rates?  It is worth checking with your mortgage broker to see how much more interest you will pay on a buy to let mortgage that is in a limited company compared to your own name.

You may find that you save tax using a limited company as a buy to let investors but pay a greater amount of mortgage interest. You may pay more mortgage interest using a limited company than the tax you save.

You will need to weigh up the tax savings against the additional mortgage interest costs.

Should you purchase buy to let properties in a limited company?

The sole aim of this article is to understand the pros and the cons of using a limited company as a UK landlord.

Section 24 mortgage interest relief

One of the key reasons why more UK landlords are using a limited company is because of Section 24 mortgage interest relief. UK landlords no longer receive the top tax rate relief for the mortgage costs of their buy to let properties. They now get just a 20% tax reduction on the mortgage interest costs. This means that buy to let property investors are paying more tax than they did before.

A limited company is not affected by the issues surrounding mortgage interest relief. All the mortgage interest costs may still be offset against the rental income of the property portfolio. This means that UK limited companies that buy residential properties still get tax relief from mortgage interest costs.

The income tax benefits of using a limited company

There are many income tax benefits of using a limited company.

– Tax-free wages

– Tax-free dividends

– Tax-free interest charged to the limited company

– Tax-free medical expenses paid on your behalf

– Tax-free non-cashable high street voucher

Extract cash out of a limited company

We have written an article on how to extract tax-free cash out of a limited company, which is certainly worth a read. Not only do the individuals benefit from the extraction of money but tax relief will also be obtained for the UK limited company.

High rate taxpayers need to be careful when taking money out of a UK limited company. This is because a number of tax reliefs will be withdrawn and the amount of tax paid on wages and dividends will increase. This means that individuals taking money out of the limited company will face higher rates of tax on their income.

It is important to speak with Optimise Accountants and their property tax specialists to see how much money you should extract out of the limited company. Getting professional tax advice is important to help your success as a property investor and property developer.

The disadvantages of using a limited company

There are a few things that you need to consider when using a limited company

– A limited company needs to have a set of accounts and a tax return done each year

– A limited company financial data will be shown on Companies House, which is a public domain

– You may be double-taxed on the income you earn. This is because the limited company is taxed at 19%. You personally will also be taxed on the money you take out of the limited company

Setting up and running a Private Limited Company offers many advantages, but there are also potential downsides involved when setting one up.

There are legal requirements such as completing annual accounts and returns to Companies House.

Setting up and running PAYE and payroll for Directors and employees within a Limited Company must also be organised.

Delivering a Corporation Tax Return to HMRC annually, which involves time, paperwork, and money.

Producing quarterly VAT returns for HMRC if your company is VAT-registered needs to be completed.

Missing a deadline or payment on money owed to HMRC could result in a large fine for your company.

Getting paid is complicated for a Private Limited Company.

A sole trader can take cash out of their business without restriction, but as an owner or Director, the Limited Company has to legally transfer money in the form of a salary or dividend.

You will need to register for PAYE with HMRC to pay yourself as a Director of a Limited Company and run a monthly payroll to draw a salary.

Setting up a Limited Company needs registration with Companies House, paying annual fees and informing HMRC.

If you decide to close your Limited Company, you need to apply to dissolve the business, which can take up to three months.

You need to consider how much money you will earn in your business and how much money you need for your lifestyle. This determines the amount of tax that you will pay.

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Why UK landlords might pay more tax using a limited company 

UK Landlords may look at their current situations and decide to use a limited company because they will save tax. The same buy to let investors need to think about the long term. A property investor may have a good job and might be a high rate taxpayer. It may be their goal to become financially independent and rely on their property income to satisfy their lifestyle needs.

Once they achieved a certain level of income, they might decide to give up their job. They now need to pull on the money that has been earned in their limited company. As such, there is now a double taxation issue. The company will pay corporation tax at 19%. The person receiving the dividends (as an example) would pay 7.5% income tax if they were a basic rate taxpayer. This income tax would increase to 32.5% income tax if they were a high rate taxpayer. Finally, an increase in the income tax rate of 38.1% would be suffered by additional rate taxpayers.

People that need all the money from a limited company will pay more tax.

Anyone that requires all the money from the limited company would pay more tax than if they had the income in their own personal name.

We will show this by way of an example. James has £25,000 of income (using 2019/20 tax rates)

£25,000 income

(£12,570) personal allowance where no tax is paid

£12,430 taxable

£2,486 income tax at 20%

 

If the person had all the income in a limited company the following would apply

£25,000 income in the limited company

£8,000 wages (tax-efficient to extract without income tax or NI)

£17,000 in profit

£3,230 corporation tax at 19%

 

James will now extract the remaining £13,770 in the form of dividends

£8,000 wages paid to him free from income tax and NI

£4,570 Dividends paid to him tax-free

£12,570 personal allowance with no tax to pay

£2,000 additional dividends to be taken tax-free

£14,570 tax-free money from a limited company

 

We now need to work out what dividends is subject to income tax

£13,770 dividends extracted from the company

£6,570 dividends taken out of the limited company tax-free

£7,200 dividends subject to 7.5% income tax rate

 

£3,230 corporation tax paid

£540 income tax in the dividends

£3,770 total tax paid

Choosing a company name

Company name

Your name can’t be exactly the same as another registered company’s name — search the Companies House register to see if a name’s been taken. Your name also can’t:

– contain a ‘sensitive word or expression unless you get permission from the Secretary of State

– suggest a connection with government or local authorities

– be offensive

You can trade using a different name to your registered name. This is known as a ‘business name’.

Business names mustn’t:

– include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company or ‘plc’

– be the same as an existing trademark

– contain a ‘sensitive word or expression unless you get permission

Similar names

Your name must be unique — it can’t be the ‘same as’ or ‘too like’ an existing name.

‘Same as’ names

‘Same as’ names are those where the only difference to an existing name is:

– punctuation

– a special character, eg, the ‘plus’ sign

– one or more words listed in the guidance on naming

Example

‘Hands UK Ltd’ and ‘Hand’s Ltd’ are the same as ‘Hands Ltd’. ‘Box.com Ltd’ is too similar to ‘Box Ltd’.

When you don’t have to use ‘limited’ in your name. The names of most private limited companies in the UK must end in either ‘Limited’ or ‘Ltd’.

What is the Settlements legislation?

The Settlements legislation prevents a tax advantage resulting from one family member diverting their income to another.

Where this involves spouses or civil partners, diverted income caught under the Settlement rules remains taxable on the spouse who diverted it.

The relevant tax legislation covers income derived from any Settlement, including disposition, trust, covenant, agreement, arrangement or transfer of assets.

Within owner-managed companies, a Settlement situation may apply where an individual enters into an arrangement of diverting income from one to another, resulting in a tax advantage.

These anti-tax-avoidance provisions are designed to prevent a person from diverting their income.

HMRC may also seek to apply the Settlements legislation where the level of dividend paid on a particular class of shares could not have been paid without minimal or no dividends paid on the other classes of shares.

If the dividend can only be paid if one class of shares receives no dividend, this may fall within the Settlement rules and be challenged by HMRC.

The scope of the Settlements legislation is limited and is not applicable where the entire asset is transferred to a spouse and not just the income resulting from it.

When used to give out different rated dividends to spouses, company shares do fall under the scope of the Settlements legislation.

If you’d like to discuss how Alphabet Shares can be used to save tax, speak to one of our tax experts.

How to structure your limited company?

What is a private limited compamny

A private limited company is simply a limited company. You may hear them called by different names such as 

– Limited Liability Company also is known as LLP

– Private limited company also is known as PLC. This is not to be mixed up with Public Liability Company (PLC)

– Special Purpose Vehicle, also known as SPV

A limited company is a legal separate entity from you. This means any legal responsibilities is on the limited company and not on the people associated with the limited company. There are times when a limited company director waives rights to be held legally responsible for the dealings of a limited company. This is rare.

It is not a simple matter of thinking of a name and then starting a limited company. Actually, it is that easy, but then there are significant tax consequences by not thinking about the tax-efficient tax structure.

A company will have a name. It is important to know what the name means and what it relates to. Your limited company will need a home, also known as a registered office.

Who runs a limited company

Directors of a limited company

There may be many company directors in a large organisation. For the vast majority of readers of this article, you likely set up with one or two directors.

Directors are often paid a salary and bonus for the financial performance of the limited company. Some directors are rewarded with shares, which they can then receive dividends from the limited company.

We discuss how directors that are also shareholders may extract tax-free money from a limited company.

Shareholders of a limited company

The shareholders of the limited company are their owners. They may or may not work within the company. Shareholders receive dividends when the private limited company makes money. They also take the risk that their capital could be lost if the business does not do very well. Shareholders are responsible for the appointment of a limited company director, who in return is responsible for the hiring and firing of employees.

Choosing the right tax structure

It is vitally important that you set the company up with the right tax-efficient shareholder structure.

There are different types of shares that you can create

– Preference shares

– Ordinary shares

– Alphabet shares

Preference shares

are usually used when you wish to have ownership in the business but you want a guaranteed form of income. You will agree on an amount to invest in a limited company. You will also agree on the % return that you want each year

Ordinary shares

This is the most common format of shares within a limited company. You agree with the value of each share and how many shares each person will pay for. The greater the number of shares the greater amount of ownership that the person has in the limited company.

Alphabet shares

Mistakes are often made by allocating “Ordinary” shares to the shareholders. This means that dividends are to be taken out of the company based on the number of shares allocated. This leads to tax nightmares. It is much better to allocate A, B, C shares to shareholders so that dividends may be taken out of the company in the most tax-efficient way.

These are very similar to ordinary shares. The reason why I specified them is for the flexibility for the payment of dividends. Let us imagine that both Sarah and John start a limited company with 50 X £1 ordinary shares each. An ordinary shareholder has to take out the same £X dividends per share. As such Sarah and John would need to share £20,000 dividends between them.

John is a tax high taxpayer and Sarah does not work. John gets his first £2,000 dividends tax-free. He pays 32.5% income tax on the remaining £8,000 dividends. Sarah receives the £10,000 tax-free as it falls below her £12,500 personal allowance.

It would have been beneficial for John to have an A-class share and Sarah to have a B class share. That way John could be paid £2,000 dividends, which are tax-free. Sarah would be paid £12,000, which still falls below her personal allowance and would also be tax-free.

Buy multiple properties from the same vendor to claim multiple dwellings relief to reduce Stamp Duty Land Tax.

Purchase the next buy to let in a company or your own name?

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Limited Company filing of accounts and confirmation statements

A limited company will have two main reporting responsibilities to Companies House.

– Annual confirmation statement

– Annual accounts

Confirmation statements

As illustrated above, there is a lot of data that is stored on the Companies House website about each limited company. The directors of the limited company will need to file the annual confirmation statement on the Companies House website.

The confirmation statement submission is to tell Companies House the members of the public if there have been changes to the people involved in the company, its address and activities.

Limited company Annual accounts

The filing of limited company accounts on Companies House may be done directly via Companies House or via an accountant using commercial software.

The annual accounts are broken into sections. The key sections that most accountants and other financially astute people will be interested are as follows:

– Profit & loss account: This shows the income, costs and profitability of the company. Micro companies do not need to show the profit and loss account on the Companies House website.

– Balance sheet: This section of the annual accounts shows the assets less liabilities to show the net asset value of the limited company.

If there is no trading activity in the business, then dormant accounts may be filed to Companies House. Dormant accounts signify to the members of the public that no income nor costs have been incurred in the year in question.

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This course will help you understand all the elements of UK tax that erodes your cash. Learn with our 100+ videos, templates and documents. You will also be able to speak with Simon every Wednesday at 7pm.
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Closing down a limited company

There may come a time when the limited company is no longer required. You can use Companies House services to close down the limited company using a DS01 form.

You need to ensure that all creditors have been paid before this process.

Changes to directors/company secretaries

The company must keep registers that contain details of its officers. They are:

 – register of directors. This will contain most details of all the company’s directors whether individuals, corporate bodies or firms with legal personalities, but will not include any individual’s residential address (unless that address is also the individual’s service address)

– register of directors’ residential addresses

– register of secretaries, if appropriate

Whenever there is a change to an officer’s details, or a company appoints or terminates an officer, it must update these registers. The company must then file the appropriate form at Companies House within 14 days of the change. The appropriate forms are:

An Appointment of director – AP01

Appointment of corporate director – AP02

The Appointment of a company secretary – AP03

Appointment of corporate secretary – AP04

Change of director’s details – CH01

A Change of corporate director’s details – CH02

The Change of secretary’s details – CH03

Change of corporate secretary’s details – CH04

The Termination of appointment of director – TM01

A Termination of appointment of secretary – TM02

Change of a company name

A change of name occurs when a company registers a name that is different to its previous registered name. For example, a company changing its name from J Smith Limited to John Smith Limited. It is not a change of name if J Smith Limited starts trading as John Smith; in which case, ‘John Smith’ is its business name.

You will need to make sure the name you wish to use is available if you are thinking about changing it. You can do a quick search using this tool.

Once you have determined that the company name is available then you need to complete the necessary name change form.

Change of office address

If, after registration, your company wishes to change the address of its registered office, you must notify Companies House of the new address on form AD01.

Changing Shareholders

On registration of a company limited by shares at Companies House, the shareholders must agree to take some, or all, of the shares. The statement of capital and initial shareholdings must show the names and addresses of the people who have agreed to take shares and the number of shares each will take. These people are called subscribers.

A company may have as many different types of shares as it wishes, all with different conditions attached to them. Typically, share types fall into the following categories:

 – Ordinary: These are the ordinary shares of the company with no special rights or restrictions. The company may divide them into classes of different values

– Preference: These shares carry a right that the company should pay any annual dividends available for distribution on these shares before other classes

– Cumulative preference: These shares normally carry a right that, if the company cannot pay the dividend in one year, it will carry it forward to successive years

– Redeemable: These shares are issued by the company with an agreement that it will buy them back at the option of either the company or the shareholder after a certain period, or on a fixed date. A company cannot have only redeemable shares

Forms required to show a change in shareholders

Here are the forms that are needed when making any changes to the share structure of the company:

 – allotment of shares – SH01

Notify a cancellation of shares – SH06

Notify a name or other designation of class of shares – SH08

Allotting a new class of shares by an unlimited company – SH09

Payment for shares in a private company can be made in a variety of ways, including cash, goods, services, property, goodwill, know-how, or even shares in another company.

Generally, people can pay for shares in a private company;

– wholly for cash

– partly for cash and partly for a non-cash payment

– wholly for a non-cash payment

Payment for shares in a public company must, in most instances, be for cash. However, if shares are allotted in a public company for non-cash consideration, the consideration for the shares is subject to an independent valuation in most cases. You must send a copy of the individual valuation report to the proposed allottee for the share(s) and to Companies House when registering the Form SH01.

Capital gains tax on selling shares

We will be writing a more detailed article on the tax implications of selling shares, but as a quick note, you are advised to speak with your accountant to help you with the valuation of your shares and the tax implications of any share structure changes. The considerations are:

– Capital gains tax (CGT)

– Entrepreneurs’ relief

– Business asset rollover relief

When you are selling/transferring shares then you will need to use the stock transfer form that may be found here

How do I transfer my rental property to a limited company?

One of the ways that many UK landlords are protecting themselves from the Section 24 mortgage interest relief cap is to move their properties into a limited company.

Initially, you would be right in assuming that both Stamp Duty Land Tax and Capital Gains Tax would be chargeable by moving a buy to let portfolio into a limited company. However, it is possible to use the property partnership route to avoid both Stamp Duty Land tax and Capital Gains Tax when moving a rental property portfolio into a limited company. This is called incorporation relief and utilises the provisions set out in the Partnership Act 1890.

You will be required to refinance your buy to let mortgages. It is, therefore, a long process and one that needs to be managed very carefully. Please do take care. Mortgage interest rates are typically higher in a limited company than if you own rental properties in your own name.

so, buy to let company or not?

You need to consider the tax benefits of using the limited company against:
– Additional buy to let mortgage interest costs in the limited company compared to that in your own name
– The double tax treatment if you wish to use the money generated from your buy to let property portfolio
– Additional accountancy and bookkeeping costs associated with the limited company
It is easy to listen to friends and read social media posts about someone else’s situation and assume that the benefits described naturally lends themselves to you. This would be a mistake.
We would advise anyone that is thinking of incorporating a property portfolio into a limited company or buying the next property inside a limited company to book time with:
– Their property tax specialist ensure that tax will be saved by using a limited company structure
– A legal person/solicitor to ensure that assets are properly documented and protected
– A mortgage broker to ensure they know the buy to let mortgage interest rates are on offer. This allows the UK landlord to know how much more mortgage interest will be incurred by using a property limited company.

How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?

It may be more simplistic for Hong Kongers to buy residential property investments in a UK limited company. Hong Kongers will need to be mindful that they will pay the 2% SDLT foreign surcharge if they do not live in the United Kingdom. One of the key benefits of investing in the UK limited company is that there are no tax liabilities in Hong Kong where UK dividends are distributed.

Learn more about our International services to help Hong Kongers move or invest in the United Kingdom

How does this Americans readers that are looking to move to the United Kingdom from the United States?

It may be more simplistic for Hong Kongers to buy residential property investments in a UK limited company. Americans will need to be mindful that they will pay the 2% SDLT foreign surcharge if they do not live in the United Kingdom.

A pitfall of owning assets in a limited company is the tax issue of Global Intangible Low-Taxed Income (GILTI). This is a tax that the IRS applies to Controlled Foreign Companies (CFC). This means that the UK company profits may be subject to US tax on your 1040 tax return even though the money has not been distributed.

Americans also need to be mindful that their 1040 US tax returns submitted to the IRS is subject to tax on their worldwide income.

Learn more about our International services to help Americans move or invest in the United Kingdom

How does this affect our British readers that are looking to move or invest in either the United States or Hong Kong?

There may be some tax implications for your UK limited company if you are thinking of moving to or from the United Kingdom into the United States or Hong Kong. UK tax will be due on the profits made in the United Kingdom. You may also need to declare these profits in the United States (see above). You do not need to worry about any Hong Kong tax because foreign income is not taxable, unlike the USA.

You may need to consider how you extract money out of the UK limited company. It may be tax-efficient in the UK to take out wages and dividends but not so much in the United States.

Learn more about our international tax services to help British people that wish to invest or move to the United States or Hong Kong

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