Since the former chancellor George Osborne introduced cuts to landlord tax relief thousands of landlords have seen their costs rise and are looking for ways to mitigate the hit. The limited company route was touted as the solution. So is it?
Here’s what the government has done as part of their buy-to-let clampdown:
- Phased out mortgage interest that can be claimed against rental income. By April 2020 mortgage interest won’t be an allowable expense for individuals and instead, there will be a 20% credit. For 40% or 45% higher or additional rate taxpayers, this means an effective 20 or 25% tax hike.
- Scrapped the wear and tear allowance.
- Introduced a 3% surcharge on stamp duty payable on the purchase of buy-to-let properties or second homes.
- Increased capital gains tax on residential property by 10% to 28% or 18% for basic rate taxpayers.
The key to the limited company question is the changes to mortgage interest tax relief and wear and tear. Landlords who own property personally pay income tax calculated on the rental income generated by these properties, not just on the profit they made after mortgage interest. When a limited company owns property this is viewed as a business and all expenses are tax deductible. Landlords can still take the income from the company in the form of a dividend, and will pay tax on this only.
Looking at it in its simplest form, a mortgaged property should be better off in a company. Indeed, thousands of landlords have now opted for this route – figures from Countrywide show a fifth of all buy-to-lets are now held by company landlords.
However, there are many considerations to think about. Here are some:
Costs of transfer
If you want to transfer property in your name to a limited company it can be very expensive. This transfer of ownership will trigger a sale and repurchase and incur stamp duty with the 3% surcharge on top. If the property has gone up in value since purchase there is also a capital gains tax hit. Plus there will be legal, valuation and mortgage fees.
Gifting land at nil cost to the personal company controlled by the landlord or close family avoids neither stamp duty nor capital gains tax.
On the whole, mortgage rates for limited companies are higher and they incur higher fees than personal ones.
Mortgagors typically ask for personal guarantees from the owner-managers of small property businesses, so any benefits from the limitation of liability are lost.
Companies have running costs. They incur corporation tax, require accounts and an annual confirmation statement to be formally filed.
The tax savings made by having the company own the property would need to outweigh the additional costs and administrative burdens of running a company.
Your current and future tax position
If you are looking to supplement your income while you work, then you may be better off not buying through a limited company as you will be taxed twice – as well as paying corporation tax, you’ll need to pay tax on the money you take out of the company. Corporation tax rates are currently at 19%. Dividends are tax-free for the first £2,000 with subsequent dividend tax rates at 7.5%, 32.5% or 38.1% depending on the level of your other income.
If your property investment is part of a long-term investment strategy and you only want the income for the future after you have stopped working then a limited company is more likely to suit.
An overview of the main tax costs to consider to understand if setting up a limited company makes sense for you:
||Property held personally
||Property held through a limited company
|Tax when buying a property
||Stamp Duty rates plus 3% surcharge.
||Stamp Duty rates plus 3% surcharge.
|Rental income taxation
||Subject to Income Tax at your marginal rate 20%/40%/45%.
||Profits subject to Corporation Tax at 19%.
If drawing an income through dividends the first £2,000 is tax-free but dividend tax rates at 7.5%/32.5%/38.1% apply on top of Corporation Tax.
|Mortgage interest tax treatment
||In 2018/19 you will be able to deduct 50% of costs from rental income before tax due, reducing to 25% next year.
By April 2020 mortgage interest won’t be an allowable expense for individuals and instead there will be a 20% credit
|Mortgage interest is an allowance deductible expense.
|Tax when selling a property
||Capital Gains Tax at 18/28% – depending on whether you are a basic or higher rate taxpayer after £11,700 annual exemption.
||Subject to Corporation Tax at 19%.
||Annual Tax on Enveloped Dwellings applies to properties worth £500,000 or more. 100% lettings relief is available but a return must be filed.
The general view is that it can be very useful when you have a number of buy-to-let properties. For landlords with perhaps one property, it’s not worth it.
What’s clear is that you will need to do some thorough sums in order to work out exactly what difference going the corporate route will make to your finances.
To get some professional advice contact Shaya Grosskopf.