Whether you have a handful of rental properties or are just getting-going, a prominent question may be: Should I have properties in my own name or in a limited company? This is an important choice to make as both the immediate and downstream impacts could be significant. If you are at the crossroads of buying property in a limited company, we want you to make the right choices for your own objectives. Arming yourself with these six key considerations will go a long way towards the best decision.
Why Buy Property in a Limited Company?
There was once a time when buying property as a sole trader was very tax efficient. It was possible to deduct mortgage interest and finance costs from your profits before tax. The UK government has since introduced tax-gathering measures such as the stamp duty surcharge and in 2020, the removal of being able to subtract mortgage interest from property rental income.
The financial implications for the property investor can be substantially more than pocket money, especially in the higher rate income tax bands. However, property mortgage interest within an incorporated company can be offset against rental income. In addition, corporation tax is significantly lower than the 40% or 45% rates that some sole traders will be paying.
It is clear why incorporating your portfolio or buying property in a limited company has become a popular choice for property investors. Setting up a limited company and transferring properties will have a price tag attached, it is therefore essential that you get things right from the outset. Everyone has different circumstances and objectives, so it needs to be clear that we are not offering advice but simply highlighting some of the important considerations that you will need to make.
The Six Things You Need to Know
- Additional Tax Implications
There are a number of other tax charges that may apply if you are transferring property you already own into an incorporated company. Firstly, as a transfer, you are technically selling the property to the company at a fair market price. This could trigger Stamp Duty Land Tax (SDLT) which would be payable by the company. Secondly, through the ‘sale’ of the asset to the company, you may also be hit with Capital gains Tax (CGT).
- Accounting Considerations
While owning or transferring property into a limited company may create cost savings, additional costs will be created through accountancy services and filing tax returns. The financial costs should be outweighed by the gains, however it will be important to consider the additional costs of time that it will take to maintain records and prepare files.
- Mortgage Lending
Mortgage lenders often have different criteria and rates when lending to a company than they do when lending to individuals. If you are transferring a portfolio of properties that is highly geared (i.e. includes a higher than average proportion of borrowed money), a situation may occur where lenders will refuse to finance the portfolio within a company.
Properties within a company will be under the ownership of the company rather than the individual and therefore any profits generated from those properties will be company gains. As a director you will draw earnings from the company which will be within the scope of income tax in much the same way as if the property was owned in a private name.
- Inheritance Tax
Owning shares in a property investment company can be a very efficient tool for estate planning. Transferring shares as part of your estate, if performed in a controlled manner, is often simpler and less costly than transferring the ownership of actual properties. It will be possible to create shares with different classes and rights, thereby making them a flexible means for managing your estate in the interests of inheritance tax.
- A Good Advisor is Priceless
When it comes to any decision that will impact your future estate and tax planning, having a quality tax advisor and accountant in your power team is of the upmost importance. Making ill-advised decisions today can have serious ramifications not only for yourself, but also for your heirs. Besides estate planning complications, getting it wrong could make you liable for SDLT, CGT and also late payment penalties.
The final point is especially important as there are alternatives and ways of mitigating costs. For example, under very specific circumstances CGT can be postponed or deferred when a property business is transferred to a company as a going concern (i.e. operating indefinitely). However, this can be challenged by HMRC, hence a good advisor is priceless.
If you are advised to consider an alternative strategy, such as holding properties within a trust for the company, approach with care. Entering into any arrangement will introduce risks and it will be important to be aware of those risks. Certain arrangements may involve complex anti-tax avoidance legislation, which will require skill and experience to navigate.
If at this point, you are feeling overwhelmed and lust for a simpler vocation; set aside your concerns because you are not alone. Understand that you do not need to know everything. What you do need to know is who to turn to for good advice. If you do not know who to turn to for good advice, we can teach you how to find the people you need as part of your power team.
If you want to get a bit more hands-on, our Asset Protection Advanced Course brings market-leading professional knowledge and experience to introduce tax, accounting and legal considerations over the space of three packed days of learning. This in-depth course includes enough content to keep even the most dedicated spreadsheet enthusiasts happy, and gives plenty of opportunity to ask questions directly to one of the UK’s top tax experts