Should I transfer my BTL properties into a limited company?

Benefits of a limited company

Generally, if you own under say ten Buy To Let properties as investments and are not running a genuine lettings business it is likely that the costs involved in transferring properties into a limited company will exceed the benefits. There are just too many tax traps.

But if you are operating a substantial lettings business then the main benefit of using a limited company to hold your properties is the fact that you’ll be paying corporation tax on profits rather than income tax. This is currently charged at 19% of profit for this tax year. This is much lower than the higher rate (40%) and the additional rate (45%) of personal income tax. However you may still be subject to income tax when withdrawing profits from the company.

Paying corporation tax also means that the recent restrictions on mortgage interest relief and relief on finance costs don’t apply.

So, on the face of it, holding buy-to-let properties via a company could make sense in some specific scenarios. For example, this article gives the example of a higher rate taxpaying landlord who owns a property that’s valued at £300,000, has a mortgage of £225,000 at 75% loan-to-value, and receives a monthly rent of £1,250.

In 2020/21, if the landlords holds the property personally, they will make an annual post-tax profit of £2,718 (down from £4,388.50 before 2016/17).

If they hold it via a limited company, they will make an annual post-tax profit of £5,935.42 during the financial year 2020/21 – that’s £3217.42 more!

So, a limited company is a no-brainer?

 It’s not that simple!

Say you hold only one property personally. To move it to a limited company, you have to sell it to that company. This means you have to pay the following on a property worth £300,000.

• Stamp Duty Land Tax at the higher rate. Your company will pay £14,000.
• Capital Gains Tax (residential property rate) of 18% if your total annual income is within the basic rate band or 28% if you are taxed at the higher rate.
• Finance costs of taking out a new mortgage for the company
• Early repayment charges (if relevant) on your existing mortgage.

You’re also unlikely to qualify for tax breaks such as incorporation relief and entrepreneurs’ relief because HMRC regards property as an investment rather than a trade or business. It’s also worth noting that limited companies don’t have such a large range of buy-to-let mortgages open to them, meaning you may have to settle for a more expensive deal. Also, when you take dividends out of your company, only the first £2,000 is tax free. Any dividends you take within your basic rate tax band are charged at 7.5%, rising to 32.5% when you hit the higher rate dividend band at £50,000.

That said, if you sell your properties to your company at market value, you could create a substantial Directors Loan Account – which can be repaid to you tax free over a number of years. Of course, if most of the property is mortgaged, the size of this loan account will be much smaller.

Also, don’t forget the additional admin and costs required to run a limited company – separate corporation tax, the possibility of tax inspections, potential audit costs (if your company is big enough) and so on.

As you can see, moving your property to a limited company quickly incurs major costs and can be a big commitment. Whether it’s a good plan to make the change in the long run, really depends on how much your portfolio is worth, how long you want to hold on to it and how much extra admin you want to take on.

But don’t rule out a limited company either

 If you hold properties personally, it may still be very worthwhile keeping that portfolio while making any new property purchases via a limited company. The same may be true if you have a larger portfolio.

So when does using a limited company start to make sense? Here are just two scenarios:-

• If you do not need to draw any income from the company in the short term
• If you wish to grow and manage a larger property portfolio as a full time occupation into retirement

Whatever your situation, we can only reiterate that the best holding structure depends on your own circumstances. If you are an existing THP personal tax client and are even slightly unsure, talk to your usual THP contact for a thorough review of your holdings – we can work with you to devise a strategy that will deliver better returns for the short, medium or long term.