Running a buy to let business as a limited company

Running a buy to let business as a limited company

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Running a buy to let business as a limited company

Running a buy to let business as a limited companyBuy to let landlords making big rental profits and looking to save tax often flirt with the idea of running their business through a limited company.

The main benefit is a company can be a tax-effective way of managing income.

Profits within the company are taxed at lower rates than top rate income tax and shareholders can manipulate their personal income by declaring dividends at just below the top rate threshold.

For the current tax year that means a full time landlord and his non-working wife could draw £43,875 each from a company before either pays 40% tax.

One of the problems is transferring buy to let properties in to a company.

Assuming a husband and wife own 10 buy to let properties valued at £1.6 million, on the transfer they have to consider capital gains and stamp duty implications.

If a business was to transfer a trading property, like a shop, workshop, or factory in to a company, the property owner could apply incorporation relief to negate the capital gains tax element because the business is a going concern.

Residential property owners cannot benefit from incorporation relief because tax law says although business rules underline how a property investment is taxed, it’s still an investment and as such is not a going concern.

Case law supports this view – judges have held that even if landlords work full-time managing their properties, even though the activity comes close to a business, it does not quite hit the mark.

So, transferring a property portfolio in to a company will incur capital gains tax if a gain has been made.

Then comes stamp duty. Expect a hefty bill of 5% of the portfolio value as the transfer is considered a linked transaction and stamp duty is charged at the highest rate on the total value of the portfolio.

And having done away with about a third of the value of the portfolio in tax, do not forget the legal fees involved in the transfer plus hefty mortgage arrangement fees and legal costs that can run to 3%+ of the borrowing as well.

Some accountants and lawyers will argue that claiming incorporation relief on a residential portfolio transfer is not tested in law – which it is not.

The problem is HM Revenue and Customs will only take a look at the matter after the transfer when the deal is too late to unravel – and those same tax advisers will want £10,000 or more of your money in barrister’s fees to seek a legal opinion to defend your position.

If you want to make legal history and have money to burn, then you could open the door for many landlords to follow in your footsteps – or you could waste hundreds of thousands of pounds.

If income tax on rental profits is an issue, we have plenty of proven methods for you to reduce it. If you need to sell you need to take advice, especially if your property(ies) have increased in value since you purchased them. If you want to access your capital gains you may not even need to sell.

Before you make any choices it’s important to know what choices you have to make.



Comments

8 years ago

So should buy to let landlords form a Ltd Company before they buy their property portfolio?

8 years ago

Simply move to a no-tax or low-tax CGT duristiction for 5 years to negate CGT liability.

8 years ago

I have a property in my Ltd Co name which was initially purchased for refurbishment and sale, however I have decided to keep and manage the property as a BTL within my Ltd Co. I have changed the SIC codes of my business with Companies House on my annual return to reflect this and am now searching re-mortgage BTL deals for this particular property. My Ltd Co. was previously used for my surveying business of which I intend to set up another Ltd Co., so the two are not linked. Does anyone know if this is legal?

8 years ago

Thanks for your coments Anon. That would work but it isn't a practicle solution for most people.

8 years ago

Our tax and accountancy partner Steve Sims at Yardleystar will be able to answer this question for you. I'll ask him to post his answer here. Alternatively you can call Steve on 01766 780165.

8 years ago

With times like these, where my portfolio may be in negative equity, is this not a decent idea to move our (my wife and my) properties into a company?
Where I cannot show a gain (capital gains) due to the deprecated value of the properties, is now not a good time to do it?
And with mortgages that I have on the properties at the moment result in a higher than normal income due to them tracking at good rates, is this not a decent idea that would benefit mean in terms of not paying gains tax, and having a lowered taxation on the property income?
thanks
darian

8 years ago

Hi Darian

Thank you for your enquiry.

You would need to sell your properties to a company. This might well cost stamp duty depending on values as well as legal fees. Then you would have to repay your existing mortgages and apply for new ones in the company name. The rates are likely to be higher and the company would have to find a substantial deposit. The advantages seem to be far outghweighed by the disadvantages I'm afraid. I suspect you will decide to stick with what you've got. That might not be a bad idea though. See this article

I hope this helps

Regards

Mark

8 years ago

Mark, re Anon's suggestion of moving "to a no-tax or low-tax CGT jurisdiction for 5 years to negate CGT liability", isn't that now in question following some recent Inland Revenue pursuit of a non-resident property owner I read about? If you remain non-resident for tax for 5 years, can you escape CGT on selling BTLs? I have the impression that is no longer enough - you may also need to become non-domiciled and severe any links with the UK that the Revenue could argue show you still have interests there. How do you see the current position on this?

8 years ago

Hi David

I think this could be the article you are referring to.

I will check with my tax partner to see if there is more that we can add to the debate and I'll either post a reply here or make an article of it in a future version of Landlord News.

Thanks for your interesting question.

Regards

Mark

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