Debbie Boyes, Director at Willowlace Ltd Professional Mortgage Advisors says “Before making any decision, getting clear advice from an Accountant about the pros and cons is an obviously good place to start.”
“But by adding one of our really experienced Buy to Let Mortgage Advisors as part of your Professional Advisory Team we can advise on how the Limited Company is best structured for lending purposes. This way you can be confident that you are setting up your new company in a way that works effectively for you.”
At Willowlace, we can source Lenders which are comfortable with, for example, Inter-company Loans, Alphabet Shareholders or Trading Companies.
Historically, the theory was to retain personal ownership of assets which were likely to increase in value. However, the recent tax changes to personally held buy to let properties means that theory is now being put to the test!
The main tax changes which have impacted on this decision include the restriction in mortgage tax relief (to 20% rather than at your higher rate of tax) and the lowering of Corporation Tax Rates to 19%.
Until April 2017, any mortgage interest would be deducted from rental profits in full, the same as any other business expense and therefore mortgage interest relief was at your highest rate of tax.
Between April 2017 and April 2020, this deduction was tapered so that currently the tax relief is capped at 20% and credited back to your tax due, rather than being deducted as an expense.
In comparison, a Buy to Let Limited Company is a separate legal entity, and one which can obtain tax relief on the entire mortgage interest payment. It then pays Corporation Tax on its profits of 19% and from 1 April 2023 of 19% (up to £50,000) and then a tapered rate up to 25% on profits over £250,000.
Whilst this may look attractive compared to personal tax rates of 20%, 40% and 45%, in order to extract profits from the Limited Company a Salary or Dividend must be declared which will attract an element of personal tax.
This may initially look like you would be paying tax twice, but it does open up opportunities to discuss Tax Planning with your Accountant!
An advantage, of course, is that you are not obliged to draw anything from the Limited Company if you do not need it. In addition, if you have used your personal funds for the deposit on the purchase of a property, this creates a Director’s Loan Account which you can draw back without a tax liability until it is completely depleted. You could also build up funds within the Limited Company to use for the deposit on another Buy to Let property.
One Accountant has told me that buying a rental property in a Limited Company can be used to save for retirement. His tip is - A higher rate taxpayer could retain the money within the company thus avoiding any large personal tax bills now. Then when the individual’s main source of income ceases such as at retirement the monies could be withdrawn at lower tax rates. For example, a higher rate taxpayer would pay Dividend Tax of at least 33.75%. But by just voting the dividends once their income reduced and they were basic rate taxpayers, they could see the dividend tax reduce to just 8.75%. Unless, of course, the tax rules change in the meantime!
One important nugget that I have picked up whilst discussing this is that of the ORDER OF TAXATION, and it is certainly something you need to talk to your Accountant about! Very simply you pay tax on any Salary or Earned Income First and then, amongst other things, your rental income. Therefore, a Director of a Limited Company may find that he/she has a small Salary, then the profits from Rental Income on personally owned properties are taxed and then the Dividends. This may mean that this group of people have only ever received 20% Tax Relief on their mortgage interest – and currently will continue to do so!
From April 2016 an extra 3% Additional Stamp Duty Premium has been levied on top of the normal Stamp Duty rates on the purchase of second homes or residential Buy to Let properties.
Buying in a Limited Company does sadly not eliminate this Additional Stamp Duty Premium!
The only way not to pay Stamp Duty is to purchase a property for under £40,000 – if you can find one!
If you sell a property owned in your personal name, you may benefit from the Capital Gains Allowance (£12,300 per person 2022/2023), and then pay tax on the rest of the profit at either 18% (if the transaction leaves you below the higher rate tax band) or 28% if you are over it.
A Limited Company will pay Corporation Tax at currently 19% and from 1 April 2023 either 19% or 25% dependant on the level of profit, without any Capital Gains Allowance.
When I have been talking to Accountants, they all seem to be warning that owners need to be very careful about doing this as there are significant tax consequences and that typically they find leaving the existing properties as owned personally is more beneficial.
The transfer from personal ownership to a Limited Company is deemed as a sale and is deemed to have taken place at the property’s current market value.
The individual would need to pay Capital Gains Tax on the deemed profit. There may also be Early Repayment Charges on any existing mortgages on the properties as Individual and Limited Company Buy to Let Mortgages are two distinctly different propositions.
The Limited Company would then need to pay the standard Stamp Duty plus the 3% Additional Stamp Duty Tax. If financing is needed, the new Limited Company would also need to pay for the set up costs which may include Legal Fees, Valuation Fees and Lender’s Arrangement Fees, and the interest rates may also be higher.
The initial cost of transferring the properties may outweigh the long term tax savings so detailed tax planning with your Accountant is a must.
Having talked to Accountants about this, it seems that there is no simple answer to this question!
Individual personal ownership is likely to be preferred by :-
Basic rate taxpayers
Those who are not affected by the restriction in mortgage relief
Owners with just a small number of properties
Those who need the rental income for day to day living
The buy to let Limited Company route is likely to be preferred by :-
Higher rate taxpayers
Individuals significantly affected by the restriction in mortgage relief
Owners of several properties and who are looking to purchase more
Those with a potentially large gain on each property disposal
Those who do not need the rental income for day to day living.
In summary, each case needs to be individually reviewed in order to achieve the best result. You need to take advice from your Accountant, but remember to include Willowlace Ltd as part of your Professional Advisory Team before you make a final decision!
With many thanks to Adrian Simpson of Simpson Associates, Accountant for his help and guidance in producing this information.