For anyone owning a buy-to-let property, setting up a private company could be a tax-efficient way of managing your affairs in the long term.
What are the tax benefits?
Setting up a limited company can make sense if you are a higher rate tax payer. Rather than paying income tax on your profits, at up to 45%, landlords who own rental property through a limited company will pay corporation tax on their profits at the much lower rate of 19%.
In the past, the income tax you paid could be offset by generous mortgage tax relief. Private landlords were able to claim tax relief on their mortgage interest at the rate they paid income tax; at as much as 45% for those paying the highest rate of tax.
Since 2017 this relief has been gradually reduced, meaning that by 2020 landlords will only be able to claim relief at the basic tax rate of 20%.
As an example, before 2017 if a landlord paid the highest rate of tax and had an interest-only buy-to-let mortgage of £1850 a month, they could have claimed £830 back from HMRC in tax relief. Under new rules this would be just £370, in 2020.
What about limited liability?
If you run your buy-to-let business as a limited company, it will be legally separate from your personal affairs, meaning that you aren’t personally liable for any losses.
What does setting up a limited company involve?
To set up a limited company you will need to register with Companies House. Your company must have at least one director and at least one shareholder, but these can be the same person.
You will need a name for your company and to decide whether you are the only shareholder, or whether you wish to extend share ownership to someone else, such as your partner.
You will also need a company address. You can use your own, address or, if you have an accountant, you can use their office.
You must register your company as an employer with HMRC, even if you are only paying yourself as a director.
Things you should know
While the tax advantages of setting up a limited company make it sound like a good idea, there are some things you should bear in mind before hurrying off to register with Companies House.
There are costs associated with running a limited company, and it may take up more of your time than managing property as a private individual.
You will be required to prepare detailed accounts which may involve paying professional fees to accountants and lawyers. You may also struggle to get as favourable a buy-to-let mortgage rate as those available to personal borrowers.
It is definitely advisable to get professional advice before you get started.
Here are five additional costs to consider:
1. Capital gains tax
Unless you set up your company before purchasing your buy-to-let property, you will need to sell your second home for repurchase by your limited company. Doing this can trigger capital gains tax, if the value of the property has risen since its original purchase.
The capital gains tax rate for residential property is currently 28% for higher rate tax payers. For basic rate taxpayers, the rate depends on the size of your gain and your taxable income.
There is no capital gains tax to pay if your limited company sells on property in the future; the company would pay corporation tax on the profit instead.
2. Stamp duty land tax
Stamp duty is also payable on the repurchase by the property. In addition, anyone buying a second home is subject to a 3% surcharge on the rate of stamp duty owed.
For example, someone buying £3m apartment in Eaton Place as their primary residence would pay £273,750 in stamp duty. Someone transferring this property to a limited company would face the higher stamp duty bill of £363,750.
3. Higher mortgage fees
Changing the ownership of the property from personal to company could also mean changing your mortgage, if you have one. This could trigger early repayment fees as well as additional legal and valuation fees.
Many lenders also charge higher interest rates and fees for limited companies compared to individual buy-to-let landlords.
4. Costs of setting up a limited company
You can apply online to register your company for the modest sum of £12. Your company will usually be registered within 24 hours. Postal applications take between eight and 10 days and cost £40. Should you need it, a same-day service costs £100 – you must apply to Companies House by 3pm.
5. Costs of running a limited company
Once your company is registered you will have additional responsibilities – you will need to prepare accounts and submit company tax and corporation tax calculations to HMRC. You may need the services of an accountant to complete these tasks. If you already use an accountant, they may charge higher fees when preparing accounts for limited companies. You may also have additional legal and auditing fees to consider.
If you own investment property in Belgravia, Knightsbridge, Chelsea, Mayfair, South Kensington, Victoria and Westminster, as an individual or through a limited company, Best Gapp’s property management specialists can tailor a service to fit your requirements.