Research by Countrywide agency, Hamptons, shows that a record number of limited companies were set up to hold buy-to-let properties in 2020. This was the second most common type of business to incorporate, only beaten by companies selling goods online or by mail order.
So, is now the time for you to think of incorporating your buy-to-let business?
The decision will be different for every business, but here are some of the pros and cons to think about.
Advantages
Control over personal income
If you run your business outside a limited company, then it’s likely you will be subject to income tax on profits as they arise, regardless of whether or not you actually need the income.
Depending on the amount of taxable income you have, your profits will be taxed at your marginal rate of 20%, 40% or 45% – possibly even higher if your income falls between £100,000 and £125,000 when the personal allowance is withdrawn.
By contrast, a limited company pays tax at 19% regardless of the level of profits and you have more control about how and when you withdraw those profits. When dividends are taken, these are taxed at lower rates than rental income.
Deductibility of finance costs
Finance costs, such as interest on a mortgage or other loan, is no longer a tax deduction for an unincorporated rental business. Instead, after your tax has been calculated, you can claim a deduction of up to 20% of your finance costs.
For many basic-rate taxpayers there will be no overall difference in tax payable, however as a higher-rate taxpayer your finance costs will only receive a maximum of 20% tax relief instead of 40% or 45%.
Additionally, if you are claiming child benefit it will be the rental profits without any deduction for finance costs which are taken into account in determining whether you breach the £50,000 income level at which that child benefit is repayable.
For many landlords the marginal rate of tax on their property income will have increased significantly as result of this change in the tax deduction for finance costs.
Limited companies are unaffected by this change and can generally claim full relief for finance costs.
Stamp Duty Land Tax holiday
Some landlords have chosen to incorporate whilst the stamp duty land tax (SDLT) holiday is ongoing; although the 3% surcharge still applies on the transfer of the property to a limited company, there are SDLT savings to be made as a result of the increased nil-rate band. You can find out more about taking a SDLT holiday in our related blog
Disadvantages
Capital gains tax
The transfer of a property to a limited company is a market value transaction for capital gains tax so there may be a tax charge on incorporation. There are reliefs available which could reduce or remove this liability, but these may not be appropriate for everyone.
SDLT
SDLT is charged on the market value of properties transferred on incorporation and so despite the SDLT holiday this can be a significant expense, especially if the value of business property is high.
It is possible to eliminate the SDLT charge if the unincorporated business is a partnership, however anti-avoidance legislation exists to prevent this if a partnership is formed in order to avoid the charge.
Practical considerations
These are many, and would include:
• Conveyancing costs
• Accounts, tax and other filing requirements for limited companies
• Change of ownership may require re-negotiation of existing mortgage arrangements
• Lack of easy access to the company’s money – it’s no longer automatically yours!
• Once done, it can be difficult and expensive to undo
• You may still have to provide personal guarantees to back the company borrowings
Ongoing tax considerations
Depending on the level of your income and the company’s it can become more expensive to pay corporation tax (19%) and dividend tax (up to 38.1%) than to pay the higher rate of income tax.
Property investment companies currently enjoy the same corporation tax rates as trading companies. However, this may not always be the case.
Additional tax charges will be incurred if your personal circumstances change and you need to live in one of the properties that is held by the company.
Summary
Clearly there are a number of different factors to think about. Incorporation is definitely not for everyone and should be considered carefully before going ahead.
If you’d like more information please contact me.
