Thinking about moving your investment property into a limited company? You’re not alone! Many UK landlords are considering this move and in fact recently some of our clients have been doing just that.
Let’s break down the practical stuff and the tax consequences so you can make an informed decision.
Practical Stuff
1.Setting Up the Limited Company
- Company Formation: You’ll need to register your company with Companies House. You can do this yourself but we always recommend that an accountant does this for you to make sure the structure of the company is set up in the most tax efficient way.
- Ongoing Compliance: Running a company means regular filings, keeping records, and preparing annual accounts. Again we would recommend that you speak to an accountant to make sure deadlines are not missed and costly penalties incurred.
- Professional Help: An accountant can be a lifesaver here, and you might need legal advice too.
2.Transferring the Property
- Legal Work: The property needs to be legally transferred to the company, which involves some paperwork and conveyancing fees.
- Valuation: You will need a professional valuation to set the property’s market value.
3.Financing:
- Mortgage Terms: Commercial mortgages for companies can be a bit pricier and the criteria might be stricter.
- Access to Finance: Lenders might be cautious with new companies, so getting a loan could be trickier.
Tax Consequences
1.Capital Gains Tax (CGT):
- Potential Hit: Moving the property to a company counts as a sale, so any increase in value since you bought it will mean a CGT bill payable by the person transferring the property into the company.
2.Stamp Duty Land Tax (SDLT):
- Charge to SDLT: This is charged at the value of the property at the date of transfer (not the initial cost to you personally). Any values of more than £250,000 will be liable to SDLT
- Higher Rates: SDLT can be higher for company transfers, with an extra 3% charged
3.Income Tax vs. Corporation Tax:
- Rental Income: In a company, rental income is taxed at the corporation tax rate (currently 19% or 25% depending on the level of profits)
- Dividend Tax: If you take profits out as dividends, there’s dividend tax to consider charged on the shareholders personally.
4.Mortgage Interest Deduction:
- Companies: Companies can deduct the full amount of mortgage interest from their taxable profits.
5.Selling and Inheritance:
- Selling Property: Selling a property from within a company will mean Corporation Tax is payable by the company at probably 25% and there could be extra personal tax payable if a dividend is then declared to the shareholders out of the sale proceeds.
- Inheritance Tax: Holding properties in a company might give more options for inheritance tax planning.
The Advantages
1.Tax Efficiency:
- Keeping profits in the company for reinvestment can be more tax-friendly.
- You get more leeway with interest deductions and other expenses.
2.Limited Liability:
- Your personal assets are protected from business risks.
3.Ability to build up a Property Portfolio under a company wrapper
- If dividends are not required by the shareholders of the company, this is a great method to build up a property portfolio using retained net rental incomes to finance the purchase of new properties.
The Drawbacks
1.More Admin:
- More paperwork and regulatory requirements.
- Likely need for professional help, which can add to costs.
2.Double Taxation:
- Profits get taxed in the company, and again when you take them out as dividends.
- CGT and SDLT payable on the transfer.
3.Mortgage Challenges:
- Potentially higher mortgage rates and stricter lending criteria.
Conclusion
Moving your investment property into a limited company can be a smart move, but it’s not without its challenges. Weigh up the pros and cons, and definitely get professional advice to see how it fits with your financial goals.
Should you wish to discuss any of these matters further, please contact us here or at info@dna-accountants.co.uk.
