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  • No tax on dividends ≤£5,000 for individuals – from April 2016, the Dividend Tax Credit has been replaced by a new tax-free Dividend Allowance of £5,000.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
Income Tax

  • Profits are taxed at marginal tax rate (up to 45%) regardless of when the money is withdrawn
Corporation Tax

  • Profits and gains on disposal are taxed at corporation tax rate (19%).
Tax on disposal of the property: UK resident

  • Subject to capital gains tax (CGT) at 18%/28%, after deducting any available annual exemption.
Tax on disposal of the property: UK resident

  • Payment date is subject to ordinary corporation tax payment deadlines and rates above.
Extraction of funds

Income tax

  • In general profits are available for the individual are fully taxed either as rental income or CGT on disposal.

Capital gains tax

  • A disposal of a property at a profit will trigger a capital gain.
  • A disposal is generally calculated at market value.
Extraction of funds from the company

Income tax

  • Potential double tax charge when profits extracted as dividends by higher rate taxpayer, or by basic rate taxpayer (from April 2016).Changes to dividend taxation from 2016/17:
  • All individuals can receive £5,000 dividends tax free
  • Three dividend tax bands: 7.5%, 32.5% and 38.1%

Capital gains tax

  • Profits may be extracted as a capital distribution on striking off (provided that assets less than £25k), or as a capital distribution on liquidation.
Losses

  • There is no sideways loss relief for property losses. Losses may be offset against other property income or carried forward.
Losses

  • Locked into the company and cannot be offset against the owner’s other income.
  • Losses can be offset against total company profits of the current or future years, as long as the rental business continues.
Stamp Duty Land Tax (SDLT)

  • Charged on purchase.
  • From April 2016 a 3% premium applies on the purchase of an additional residential property.
Stamp Duty Land Tax (SDLT)

  • Charged on purchase from or gift by an individual to their connected company.
  • April 2016 a 3% premium applies on the purchase of residential property by companies.
  • Applies at a rate of 0.5% on share acquisitions of £1,000 or higher.
Inheritance Tax (IHT)

  • BPR relief is unlikely to apply in respect of let property: it is an investment asset.
  • Beneficiaries of the estate on death will receive the property at market value so there would be no capital gains tax for them to pay on an immediate sale.
Inheritance Tax (IHT)

  • When more than 50% of the profit or turnover is derived from an activity other than property inside a limited company, passing on shares is usually free from inheritance tax.
VAT

  • Residential lets are always exempt, however commercial letting can be standard rated if the owner has opted to tax.
  • If the property qualifies as a furnished holiday let, then the income generated is standard rated and the owner will have to charge VAT if they are registered.
VAT

  • Income from property letting is exempt from VAT with the exception of commercial letting which is standard rated if the company has opted to tax the building.

Should you wish to discuss the best investment purchase option for you, please contact one of our SAIL advisors.

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