Owning property via a limited company is now significantly more beneficial for landlords due to a chain of transformative tweaks to income tax relief rules implemented by the government.
The transaction is a perfectly legal one and, best of all, opting to explore this route, and finalising the process, can be relatively straight-forward to do.
Are you looking to transfer ownership?
It is important, when moving your property portfolio over to a limited company structure, to consider it a ‘sale and purchase’ transaction, rather than a ‘transfer’, which is a slightly misleading term in this context.
That is because your purchase is subject to the same additional costs and fees as any other house sale, including: Stamp Duty Land Tax (SDLT), Capital Gains Tax, conveyancing/legal fees and early redemption charges (if applicable).
Incorporating property businesses has become a more familiar procedure for landlords since the buy to let market underwent those changes.
With higher relief rates unavailable since April 2020 — a perk that had incentivised investors to enter the market — strategies were re-adjusted.
In this scenario you are representing both the buyer and the seller, which is quite a convenience given it’s a requirement for the transaction to reach completion on the exact same day.
Your limited company would need the necessary funds available — either cash, in an account or via a bridge loan (if required) — to buy the property, which can then be replenished.
As a consequence of your property switching to a limited company ownership, you’re able to treat mortgage interest as a cost, with corporation and dividend tax rates significantly lower than the income tax rate for high-end taxpayers.
Can any limited company buy a house?
Any limited company set up with the correct credentials has the legal capacity to acquire assets.
Whether it’s an existing LTD, or one created for the specific purpose of taking on a property portfolio, private landlords are able to capitalise.
A company name can be registered with Companies House by following these guidelines: appoint at least one director, name shareholders and issue shares and prepare a Memorandum of Association and Articles of Association.
It costs as little as £12 to register a new company and acquire a certificate of incorporation, which ratifies the company’s existence.
This is an avenue a private landlord with a vast property portfolio might take, rather than one that returns a modest income, due to potential tax savings.
However, though you may own a property, you’re not at liberty to sell it to your limited company at a discount price. Purchases have to be made at full value with tax implications coming into consideration.
What are the benefits of buying (or owning) a house with a limited company?
- Disparity in tax rates: Instead of paying income tax on your rental income, your limited company will file a corporation tax return. The corporation tax rate is 19% for the 2021-22 tax year, which is much lower than the personal income tax, which can be charged at 40% for those in the higher tax bracket.
- The more the merrier: Owning a vast portfolio of properties can come at an expense for private landlords. Profits from rental income are taxed via income tax alongside their other earnings. An income between £50,001 and £150,000 above your personal allowance is taxed at 40% while an additional rate over £150,000 is taxed at 45%. The savings can be substantial if switching to limited company ownership as these charges are negated.
- Retain more profits: Retaining more of your profits makes cultivation in the market easier. Additional funds can be reinvested, which provides opportunities for landlords to expand their portfolios when investing in properties via a limited company. Additionally, there are no National Insurance charges on profits made through a company.
- Other tax benefits: Limited Company structures also offer potential Inheritance Tax (IHT) and Capital Gains Tax (CGT) benefits, as family members can be appointed shareholders and directors.
- Reduced risk: Purchasing a property through a limited company reduces personal financial risk as this is restricted to the company’s assets/liabilities.
It’s always important to do your own research
At Hull Cash Buyers we recognise the magnitude of this decision and appreciate that any decision will be entirely dependent on your personal circumstances.
Additional costs such as SDLT and GCT on top of legal fees and potential early redemption charges can be prohibitive for some landlords, which may prevent them from transferring to a limited company investment structure.
It’s important to consider the size and income of your portfolio as well because the costs and hassle involved in the early stages of the transaction can exceed any potential benefits from reduced/alternative tax rates.
We would advise you to weigh up all the pros and cons before you decide on transferring buy-to-let property into a company. It may also be a good idea to seek expert advice from a professional business adviser or/and an accountant or tax adviser.
If you liked this guide, you might also be interested in our breakdown of selling inherited property.