Landlord looking to transfer property to a limited company – the pros and cons

Landlord looking to transfer property to a Limited Company?

In recent years, the buy to let market has been subjected to a number of punitive changes that have been introduced by the UK Government, culminating in a key development back in 2017 which saw higher rate tax relief on mortgage interest starting to be phased out. Since April 2020 mortgage interest now only attracts tax relief via a credit of 20% – relief at higher rates is no longer available. In times now gone by, this potential higher rate tax relief was a big incentive for investors who were considering entering the buy to let market but that has now changed. So what does this actually mean for you as a buy to let investor? Should you be looking to transfer property to a limited company?

We take a look at the circumstances in which incorporating your property business could be worth your while.

Why should I be looking at this?

If as a landlord you hold property personally in your own name or jointly, then currently you are taxed on profits (income minus expenses) at your marginal rate of up to 45% regardless of whether you actually withdraw any money from your business. As mentioned above, from 2017 landlords (whether or not they are joint owners) who hold BTL property in this way were no longer be able to benefit fully from higher rate tax relief on any finance costs. By way of comparison, landlords who currently hold properties through a limited company currently pay Corporation Tax on their profits at a much lower rate. Therefore, this could mean that choosing to become incorporated (i.e. holding your properties through a company) would seem to result in a more tax-efficient option for landlords who are higher rate taxpayers.

Ok – great but where’s the catch if I wish to transfer property to a limited company ?

Before you rush out and incorporate, there are a number of key things that you need to be aware of and in the vast majority of scenarios, these considerations are likely to rule out landlords with under about 10 properties in their personal names from choosing this strategy :-

• When you transfer your rental properties to a company they will then belong to your company and you will no longer own them personally. Instead, you will own shares in the company. But you generally can’t mortgage an asset you don’t own and your mortgage company may well not agree to transfer their mortgage over to a limited company. You would probably need to pay off the existing personal mortgages and take out new commercial ones so that your company could then buy the properties from you at market value. Commercial mortgages tend to be more expensive (higher rates of interest) than personal ones so the increase in monthly finance cost could offset part of the tax saving. Obviously this is only a disadvantage if you have BTL mortgages on your property.
• Capital Gains Tax (CGT) would probably need to be paid on any gain you may make when you sell to the company (must be at market value) but you may be able to avoid this by using something called “Incorporation Relief” to defer any CGT. You will need to check carefully that your circumstances are such that you would qualify for this relief to avoid an immediate large CGT bill when you incorporate. Important Note:- Most small landlords who do not run a full time property management business will probably not meet the qualification criteria.
• Don’t forget about Stamp Duty Land Tax (SDLT) too which would will probably have to be paid based upon the open market value of your properties that are being transferred – again, this is another large initial financial outlay to consider.
• Then there are the ongoing costs involved (and time you will need to spend) in having Limited Company accounts prepared annually and dealing with all the other statutory reporting and compliance tasks required by limited company owners/directors.

So should I become incorporated or not?

At THP we recognise that this is a big decision and entirely dependent on personal circumstances. There are many tax traps to consider and if you get it wrong and fail to complete all the paperwork correctly it could cost you dearly.

We have now written a completely new section on our website for BTL Landlords and you can find this here:-  Making Buy-to-Let More Profitable

This includes more detailed information on transferring properties to Limited Companies or buying new investment properties using a Limited Company which you can find here:-  Should I transfer my BTL properties into a limited company?

In very general terms, if you have BTL portfolio with less than 10 properties, the costs (initial and ongoing) and hassle involved in transferring your privately owned properties into a limited company are likely to exceed any potential tax saving. This is not always the case but in our opinion, this is true in the majority of scenarios.

Once you are an existing Personal Tax client of THP and we have prepared at least one Tax Return on your behalf, you will be able to benefit from our comprehensive tax planning services for Landlords.

Alternatively, if you are a Landlord with ten or more let properties in your name and are interested in having a Limited Company Suitability Review and Report produced (Fees from £1500 + VAT), please get in touch for a tailored quotation.