If you are thinking of investing in a buy-to-let property, setting up a company could limit your tax bill.
If you own buy-to-let properties personally the rental profits are taxed at your personal tax rate. Capital gains will be taxed at 18% – 28% depending on your taxable income. The capital gain in a limited company will be charged at the corporation tax rate of 19%.
It is important to understand the advantages, disadvantages and responsibilities associated with Limited company ownership of buy to rent properties.
Advantages of using a Limited Company
- The rate of Corporation Tax is currently 19% (if profits are below £300,000). If you are a top rate tax payer, the tax payable via a Limited Company will be lower than tax on individual income (which will vary depending on your personal circumstances, but would usually be 20%+).
- No tax on dividends ≤£5,000 for individuals – from April 2016, the Dividend Tax Credit has been replaced by a new tax-free Dividend Allowance of £5,000. As a limited company owner you can withdraw at least this amount with no further tax consequences.
- Mortgage interest will no longer be a fully allowable expense for individual property investors (where one is a higher rate taxpayer), but it will continue to be allowable for companies that hold property.
Disadvantages of using a Limited Company
- No Capital Gains Tax (CGT) allowance when the company sells a property – whereas individuals selling a property would have an £11,100 CGT allowance (2015/16)
- Additional cost of running a Limited Company – such costs include the preparation of accounts, company tax and corporation tax calculations for HMRC, filing at Companies House, legal fees, and annual auditing if applicable (usually less than £1,500 per annum depending on scale).
- Higher mortgage rates – Most lenders charge higher interest rates and fees for Limited Companies compared to Individual Buy to Let mortgages, but this can depend on your history and relationship with the institution. For new buy to let investors it may be difficult to get a mortgage from an institution unless you provide personal surety.
- Reduced choice of lenders and mortgages – Many lenders do not offer mortgages to Limited Companies, and often if they do, the product range is much smaller.
Comparison between buy-to-let being held personally or in a limited company:
|HELD PERSONALLY||HELD THROUGH COMPANY|
|Tax on disposal of the property: UK resident
||Tax on disposal of the property: UK resident
|Extraction of funds
Capital gains tax
|Extraction of funds from the company
Capital gains tax
|Stamp Duty Land Tax (SDLT)
||Stamp Duty Land Tax (SDLT)
|Inheritance Tax (IHT)
||Inheritance Tax (IHT)
Should you wish to discuss the best investment purchase option for you, please contact one of our SAIL advisors.