The tax pros and cons for transferring property into a limited company

The Tax pros and Cons for transferring property into a limited company

We provide property accountancy services for property companies, landlords and property investors to minimise tax.

When it comes to property, up-to-date specialist accountancy knowledge is required to keep you on the right side of the law while maximising your tax relief and minimising capital gains tax. No one wants to be paying more tax than they need, and most landlords, no matter how long they have been in the business, need some help keeping on top of their financial and administrative obligations and duties.

Some of the services we provide:

  • preparing rental accounts
  • preparation of tax returns
  • landlord specific reliefs
  • advice on property tax
  • looking at your expenditure to ensure you maximise tax deficiencies
  • improve profit levels

The most frequent ask questions about transferring property to limited company 

My broker wants me to put buy to let properties into a limited company to save on tax , should I do it? 

This is generally good advice if you own several properties. If you only rent out one or 2 properties the money you will receive an tax relief poorly will balance out other taxes and fees involved such as stamp duty, capital gains tax, and corporation tax. 

What are the drawbacks of limited company property investment?

There are a few drawbacks of limited company property investment that you need to consider or take advice before making a decision. Commercial mortgages to companies typically have higher interest rates attached to them, so although you will be entitled to claim tax relief on rental income, your mortgage payments could increase. Also, when you decide to sell the property in the future, you be required to pay corporation tax on any income, as well as additional taxes.

What are the benefits of limited company property investment?

In certain situations there can be benefits of having a limited company property investment. There will be more options available to you such as using a family investment company instead of a trust if you plan to leave your property to your family. In general, transferring property to limited company will reduce your tax burden, and you will be able to claim tax relief.

How much does it cost to incorporate your buy to let properties into a limited company?

Incorporating your buy to let properties into a limited company will incur legal and financial fees. These could range from £7000-£30,000, but this depends completely on the services that you require. Unfortunately you won’t be able to avoid paying mortgage arrangement fees, solicitor fees and taxes.

What are the tax considerations when selling residential property to limited company?

The main differences between being an individual buy to let landlord or trading as a company are primarily related to taxes.. As an individual, you pay tax based upon which tax bracket(s) your income falls into. As a limited company, you pay taxes on a fixed percentage of your earnings. It is true that limited companies do not pay capital gains tax, but they will have to pay corporation tax on any profits made from selling the property and stamp duty.

What are the stamp duty costs when transferring the property to a company?

Stamp duty rates have been changing recently and it is advisable to check on the HMRC website for the most up-to-date rates. For residential property rates this can be found by clicking here. For corporate bodies, the most up-to-date rates can be found by clicking here.

Is it really worth incorporating your buy to let portfolio into a limited company?

If you have at least 6 properties and want to continue keeping your portfolio or increasing your portfolio over the next 5 to 10 years, it is likely to be worthwhile financially. This can still depend on a case to case by case basis and therefore it is recommended that you discuss your options with a financial adviser.

What are the possible gains tax changes in 2021?

The capital gains tax on any UK property sold after April 6, 2020 must be reported and payment made within 30 days of selling. Failure to do so could result in a penalty or paying higher interest. This applies to individual landlords who will need to pay a fixed capital gains tax of 28% of the property itself and 20% on other chargeable assets. This is the same as a higher rate income taxpayer. For basic rate tax paying individuals, the amount depends on the size of the gained by selling the property. Limited companies do not pay capital gains tax on any sale of assets but will be liable for corporation tax on any profits made from selling assets.

How will section 24 mortgage interest relief affect me?

The section 24 mortgage interest relief changes affect individual landlords in that there is now a fixed rate you can claim. For higher taxpayers, this not only results in an increase in your tax bill but also the risk of entering higher tax brackets. The changes will be introduced in a phased approach with the elimination of tax relief on mortgage interest payments taking place as follows:

  • Landlords currently can offset 75% of their mortgage interest vs. rental income
  • From April 2018, this will fall to 50%
  • In April 2019, this will fall again to 25%
  • In April 2020, it will be reduced to 0% and will be replaced by tax credit of 20%, limiting the short-term impact

Limited companies are still entitled to claim financial costs as a taxable expense. Landlords can, therefore, optimize the commercial benefits of running a property by transferring it to a limited company. 

Contact us now for a free informal discussion.

We are experts in preparing tax returns and can help with incorporating residential properties into a limited company. for clients.  Please contact us at Accurus Accountants for an informal discussion.
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