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What You Should Know About Moving Your Property Investment to a Limited Company

Published: 6th April 2018

What You Should Know About Moving Your Property Investment to a Limited Company

Thanks to the recent changes in tax laws, many property investors are now investigating whether buying property through a limited company is a more viable financial option than purchasing it privately.

The removal of the mortgage interest relief has left many private landlords with much smaller profit margins. As the laws are different for properties purchased through a limited company, many now feel that setting up their own company with which to buy the property would be a better path to take.

As with any type of investment, there are pros and cons in setting up a limited company, and it is important that you understand what it means for you.

A limited company is considered to be incorporated, which means it has its own legal identity, allowing it to own assets and sue in its own right. This means that the owners of such a company are not personally liable for any debts.

The Benefits of a Property Investment Limited Company

Purchasing a property as a limited company is often considered to be more tax efficient, as there a lot of tax laws that will no longer affect the investment. One of the most significant tax laws that does not apply is the one relating to mortgage interest relief. This means that mortgage interest can still be considered a tax-deductable cost, which is not the case if you buy the property as an individual.

As most landlords fall into the higher tax bracket, their earnings are taxed at 40%. The profits made by a limited company are taxed at the current Corporation Tax rate of 19%. However, it is worth remembering that when you take dividends out of the company, you are likely to then be taxed on them, so you need to consider how this route would work for you.

If you choose to set up a limited company by yourself then you will be both the shareholder and the director. This means you are responsible for both owning it and running it. This is not necessarily a venture which needs to be taken on alone, as you may want a business partner to split your income with and potentially save on tax.

If you were to make your child a shareholder then HMRC would tax their dividends at the same rate as you, making it a costly exercise. This is only really advisable if you can be sure that the child would not be paid any dividends until they were 18, as there would be no tax to pay.

Corporation Tax

Limited companies in the UK are liable to pay Corporation Tax on their profits, and you must complete a Company Tax Return to calculate how much Corporation Tax you owe. The taxable profits for Corporation Tax include the money made from rental income and selling assets at a profit. You will be required to pay 19% on all of the profits that your business makes which means you are able to deduct costs, even including mortgage interest.

Dividend Tax

The mortgage interest relief rule is not the only tax law being changed, as the laws relating to Dividend Tax are also being modified. The amount of tax-free dividend you can claim will drop from £5,000 to £2,000 on 6th April 2018. Basic rate taxpayers will then be taxed at a rate of 7.5% whilst those earning over £45,000 will be subject to the higher rate of 32.5%.

As you will have paid 19% Corporation Tax on your profits first, you will only pay Dividend Tax on the dividends you take after Corporation Tax and the tax-free dividend have been applied. How much tax you are required to pay depends on how much dividend you take from the business each year, as you do not have to pay it all out.

Transferring Property to a Limited Company

For those who already own property, it may be worth transferring your portfolio into a limited company, but this will need careful consideration. Whilst you may be transferring the property to a company that you own, it will still be considered a sale that is subject to Capital Gains Tax. As the limited company will be seen as purchasing the property, they will be required to pay the relevant level of Stamp Duty as well. There will also be a number of professional fees that will need to be paid when organising a transfer such as this.

As the limited company does not actually give any money to the property owner, you will then have a director’s loan account, which means you can repay yourself the loan instead of taking the profits as a dividend and therefore potentially save a considerable amount of tax.

It may also be possible to claim incorporation relief to avoid Capital Gains Tax if you incorporate your whole property portfolio into a company. The downside to this is that you will be required to prove that you are running a property investment business and are not just a private investor.

Purchasing property through a limited company, or transferring your property to one, can have its benefits, but this largely depends on your personal circumstances. It is worth seeking professional advice to help you calculate whether this would save you some tax, and whether it is something you should do alone or involve a partner.

Whatever choice you make, it is clear to see that tax changes that have been brought in by the Government are now making property investment into more of a business whether you own one property or 100.

 

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Pure Investor - Property Investment