Article relevant to the tax year 2020/21
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.
You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.
We have written an article that shows what Stamp Duty Land Tax is and how it is calculated. You may wish to calculate and save the SDLT liability. We have created a modestly priced spreadsheet for you to do this. Go ahead and buy the SDLT calculator for just £9.95
Why do people use a limited company?
There are many reasons why people use a limited company as a buy to let property investor. 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.
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 20% tax reducer on the mortgage interest costs. This means that buy to 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.
Why you should not use a limited company as a UK landlord
As mentioned above, many buy to let property investors use a limited company for tax reasons. As we have illustrated above, a limited company will pay corporation tax. The shareholders receiving dividends would also be subject to income tax. We have used examples to show that people needing all the money would pay more tax using a limited company than they would be keeping the money in their own name.
How to structure your limited company?
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. There are many considerations when setting up a limited company. It is important for you to know what they are before you jump in and make costly mistakes.
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. There are people involved in the running of a limited company. There are shareholders that own the company and company directors that are responsible for the careful running of the company.
It is vitally important that you set the company up with the right tax-efficient shareholder structure. 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.
Download your buy to let tax guide here, written by our property accountants
Buy multiple properties form the same vendor to claim multiple dwellings relief to reduce Stamp Duty Land Tax.
How do I transfer my buy to let property to a limited company?
One of the ways that many UK landlords are protecting themselves from 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 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.
Do you pay Stamp Duty Land Tax when buying a property in a company?
Stamp Duty Land Tax does have to be paid whenever there is a purchase of land or property. The fact that a limited company buys the buy to let property or an individual does not change matters. Both, a limited company or an individual will pay Stamp Duty Land Tax when making a property purchase.
It is also worth noting that the 3% Stamp Duty Land Tax higher rate becomes chargeable to a limited company. The 3% SDLT higher rate only applies to individuals where they already have a property in their own name. SDLT higher rate (3%) also applies to property that exceeds £40,000. The 3% SDLT higher rate is applied to the entire value of the property, unlike the Stamp Duty Land Tax scaled rates.
This is not the same for limited companies. The limited company will pay the 3% higher rate even if it does not own any property investments.
Is it a good idea to buy an existing business?
Given the above, you might think it is expensive to buy property in your own name or in a limited company, due to the scaled Stamp Duty Land Tax rates and the 3% SDLT higher rates.
One of the benefits of buying the company that owns property rather than buying properties individually is the reduction of tax. Buying a limited company will require you to pay Stamp Duty (SD) and not Stamp Duty Land Tax or the 3% SDLT higher rate. This is a great tax saving to buy the company rather than purchasing an individual buy to let property.
John is looking to buy a property investment for £250,000. He is speaking with one landlord about buying the property that is held in a limited company. He is also offered to buy the limited company instead.
If he were to buy the property from the company, then the SDLT charges would apply
£250,000 purchase price
£2,500 SDLT banded rates from the above table. The first £125,000 is not subject to SDLT. The second £125,000 is taxed at 1%
£7,500 3% SDLT surcharge tax rate
£10,000 total SDLT for buying a property investment with a value of £250,000
If John were to buy the company, he would save a significant amount of SDLT.
£250,000 market value of the property
£150,000 mortgage on the buy to let investment property within the company
£100,000 net asset value of the company
The Stamp Duty (SD) rate is 0.5% of the £100,000. The SD rate is £500.
John would save an incredible £9,500
How can a limited company get a mortgage?
A limited company is able to obtain a buy to let mortgage, just like an individual. You will need to speak with your mortgage broker to discuss the rates and terms of the mortgage. There is a greater application process and the mortgage interest rates within a limited company is higher than the mortgage interest rates in your own name.
How do you take money out of a limited company?
There are many ways in which you can take tax-efficient money out of a limited company.
People that use tax-efficient company structures tend to take a mixture of salary and dividends. It is important not to get caught out by National Insurance Contributions by taking out wages or a salary that exceeds the lower earnings level. Both the employee and employer will be liable for National Insurance Contributions if too much salary is paid to the employee.
There are many other ways in which tax-efficient money can be taken out of the company. Examples being private pension contributions, shopping vouchers, the interest charged by directors and shareholders for the loans made to the company.
Can you live in a house owned by your company?
HMRC states that the property will be a dwelling if all or part of it is used, or could be used as a residence, for example, a house or flat. It includes any gardens, grounds and buildings within them.
An ATED return will need to be completed if the below criteria is met:
- dwelling is situated in the UK;
- It was valued at more than £500K
- It is owned either by;
- A company;
- A partnership where one of the partners is a company; or
- A collective investment vehicle (such as a unit trust). FA 2013, s.94
As HMRC show that an ATED return must be made within 30 days of the date on which the property first comes within the charge to ATED for any chargeable period. Where the single-dwelling interest is held on the first day of the chargeable period, specifically 1 April each year, the return must be filed by 30 April in the year of charge. For example, if the chargeable person owned a property on 1 April 2017, a return must be submitted by 30 April 2017.
You must make a separate return for each dwelling where any ATED liability is due.
The ATED charge will be applied as follows for the year 1 April 2020 to 31 Mar 2021 (payable by 30 April 2020)
|Property value||Annual charge|
|More than £500,000 up to £1 million||£3,700|
|More than £1 million up to £2 million||£7,500|
|More than £2 million up to £5 million||£25,200|
|More than £5 million up to £10 million||£58,850|
|More than £10 million up to £20 million||£118,050|
|More than £20 million||£236,250|
Selling a limited company and claim entrepreneur tax relief.
It is possible to sell a limited company and pay just 10% tax on the money taken out of the company. The 10% tax rate relates to the entrepreneur’s relief when closing down a trading company.
Please note that the entrepreneur’s relief cannot be obtained if you have a limited company that owns buy to let investments. The only property company that benefits from the entrepreneur’s relief is trading companies. Flips to you and me. There are many hoops that you have to jump over to claim this 10% tax rate but could be worthwhile.
HMRC’s new anti-avoidance provision called Targeted Anti Avoidance Rule (TAAR). The sole aim is to prevent property developers from opening and closing down limited companies to gain a tax advantage. Again care is required if you wish to use the 10% tax rate when closing down a limited company.
Should you use a company car?
One of the considerations is the use of a company car via your limited company. It sounds like a clever and tax-efficient plan. You drive, the company pays.
The reality is that the company can buy or lease a car for you. The issue is that the limited company providing you with a car has a tax liability. The limited company will pay 13.8% employer’s national insurance for the taxable benefit of providing the car to you.
You too will pay both income tax and employee’s national insurance contributions for the use of the company car.
There are some upsides, especially where the company provides you with an electric car. There are no tax benefit charges in 2020/21. In the future, these benefit in kind tax charge rates will be minimal. The limited company that provides the car will also benefit from capital allowances that will help you reduce corporation tax liabilities.
If you want to know more, then please read our “buy to let tax tips for UK landlords” article.
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