Since the government introduced amendments to landlord allowances in 2017, it’s been increasingly common for property investors to transfer their buy to let broker portfolios to a limited business.

The shift is primarily around the inability to deduct costs such as mortgage interest from self-assessment tax liabilities, with only a 20% allowance claimable.

As with all mortgages, it is essential to understand when this option might be beneficial – and the pitfalls involved.

Our mortgage brokers team explores the pros and cons of transferring buy to let mortgage properties to a limited company. For more tailored advice or to assess your finance options, please get in touch with us on 0330 304 3040 or email info@revolutionbrokers.co.uk.

Benefits of Owning Rental Properties As a Ltd Business

First, we’ll run through the upsides and reasons it might be preferable to manage an investment property through a company rather than as an individual landlord.

Higher Mortgage Interest Relief Allowances

In the past, all mortgage interest was a deductible expense so that a rental landlord could reduce their tax bill accordingly.

Following a tapered reduction in that relief, an individual landlord can only claim a 20% tax credit.

Therefore, taxpayers in a higher or additional bracket may pay a higher tax rate on a considerable proportion of their income.

Transferring that property to a company overcomes the problem since all financing costs are claimable expenses without restriction.

Lower Corporation Tax Rates

The basic corporation tax rate is 19%, which for most taxpayers is much lower than their effective income tax rate – especially when you consider that as a company, you’ll pay taxes against a lower profit figure, owing to the additional expense allowances.

Private landlords pay income tax at rates from 20% to 45%, depending on their earnings within the year.

Owning a rental asset as a company can mean a tax charge of less than half that you’d pay as a private owner.

Legal Status Protection

Another positive is that a limited company is a separate legal entity from the owner.

You can be a 100% shareholder and a sole director but still, have a degree of separation from the business if something goes wrong.

This risk protection can be invaluable if something happens, such as property repossession. Your personal assets will not be on the line if you own a rental investment through a company.

Note that any personal guarantees signed on behalf of the company require professional advice as this may extend your risk exposure according to the limitations of the contract.

Tax Planning Advantages

As a landlord, planning for your tax liabilities is always essential, and you might find that the benefits of owning properties as a business make a big difference.

If you own a rental property as an individual, you need to pay income tax on all of the profit made, depending on your tax bracket.

However, if you own a property through a registered business, you only need to pay the lower corporation tax rate on the rental profit.

Other funds are retained as reserves, and you can use this capital to reinvest in expanding your portfolio.

Landlords might also use additional cash to contribute towards a director’s pension or pay themselves a tax-efficient dividend.

Other benefits include the option of selling the company instead of the specific property if you decide to move on. Share sales are taxed at 0.5% Stamp Duty, saving a significant amount of expense.

Disadvantages of Owning Rental Properties As a Ltd Business

There are many positive reasons to own rental properties as a company, but there are potential issues to be aware of.

Capital Gains Tax Exposure

Capital Gains Tax is payable on profits (or gains) made through capital assets. That includes things like properties, investments and shares.

If you decide to transfer a rental property you already own to a limited business; the transaction is considered a sale. The profit will be liable for Capital Gains Tax and Stamp Duty.

This initial extra cost depends on the market value of the property.

Higher Mortgage Interest Rates

Commercial mortgages are widely available, so if you need financing to pay for the cost of purchasing a rental property, there’s no reason you can’t do so.

However, it’s worth pointing out that fewer mortgage lenders in the UK offer commercial mortgages than a standard residential mortgage.

Interest rates are usually higher, but borrowing costs may be less than the tax savings made elsewhere.

Tax on Dividend Profits

Dividends have a tax-free allowance of £2,000. After that, you need to pay tax on dividends at your usual marginal rate.

You’ll also need to file a return called an Annual Tax on Enveloped Dwelling (ATED) if a company owns a property valued above £500,000.

Finally, company ownership involves additional compliance costs since you’ll need to pay fees to register the business, file annual accounts and submit yearly confirmation statements.

Expert Advice on Rental Property Ownership Structures

If you’re unsure whether to transfer a buy to let property, we’d recommend seeking advice from the independent, whole-of-market team at Revolution Brokers.

The correct solution depends on your plans, tax bracket, portfolio and finances, so it’s wise to seek guidance before making any long-term decisions.

Give us a call on 0330 304 3040 or email via info@revolutionbrokers.co.uk, and we’ll run through all the options in more detail to help you make an informed decision.

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