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 buy to let limited company or not?
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.
Should you purchase buy to let properties in a limited company?
You may be interested in our main article on Limited companies and tax structures. You may also be interested to know how more about our property tax services to help you buy and rent residential properties in a more tax-efficient way.
The sole aim of this article is to understand the pros and the cons of using a limited company as a UK landlord.
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.
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 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
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.
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.
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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.
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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How do I transfer my rental 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 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.
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.
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 post about someone else’s situation and assume that the benefits described naturally lends itself 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 to 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 what 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 is 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.