Is using a limited company better for tax?
There is one loophole in the new Buy-to-let tax rule; it does not apply to businesses. Limited companies will not be affected by the new rules coming into force from April 2017. Interest for limited companies is classed as a business expense and fully deductible against income.
Companies pay corporation tax at a fixed rate irrespective of the size of the profits. The Corporation Tax rate is currently at 20% reducing to 17% in 2020. This is far more attractive when compared to the 40% for higher rate tax payers and 45% for additional higher rate taxpayers.
So, should you move your rental property into a company? There is no easy answer to this question. It can depend on several factors such as how many properties you own, whether you need the income quickly, how long you want to hold on to the properties and of course your individual circumstances.
Will there be costs involved with setting up a company? Yes, existing property owners looking to transfer a current BTL property into a limited company would effectively need to “sell” their current Buy-to-let properties to their new company at market rate, attracting capital gains tax on any increase in value of the property. Then on top of this the company would also have to cough up the 3% of extra stamp duty levied on second homes.
But for new purchases, buying in a limited company is likely to be worth considering for anyone who’s likely to exceed the basic-rate tax band.
Due to the complexities in this area we recommend that Landlords seek proper professional advice before making the decision to move to a limited company structure.
What else needs to be considered?
Taking money out of the company
There are other questions and costs to consider when setting up a limited company, for example how is the money in the company is passed to the individual? The money can be taken out of the company as a dividend, but from April 2016 only the first £5,000 of dividend income is tax free. Any dividends taken out above this amount this will either be charged at 7.5% for a basic rate taxpayer 32.5% for a higher rate taxpayer or 38.1% for an additional higher rate taxpayer. This tax is after the corporation tax at 20% has been paid.
The money could be taken as a salary, but the company would have to operate PAYE and pay Employers National insurance contributions. In some cases, this can work out more expensive than paying dividends.
If you’re planning on selling the properties on its worth remembering that companies don’t benefit from the £11,000 annual capital gains tax allowance. As a company, you’ll pay 20% corporation tax on any gain made from the sale of a property, then you’ll pay tax to extract the money from the company.
So, if you’re looking to sell your BTL properties on in the near future its worth doing your sums, it could work out to be less tax efficient than if you were holding the property as an individual. Even a higher rate taxpayer only pays 28% on any gain from the sale of a buy to let as an individual.
Companies are also required to prepare accounts to be filed with company’s house, and prepare and file corporation tax returns which can be more onerous than self-assessment returns.
Interest rates charged on mortgages to companies (commercial mortgages) have historically been higher than to individuals so further investigation of the comparison of the rates charged should be considered alongside the tax implications.
A limited company, or a Limited Liability Partnership may be a more tax efficient way of owning buy-to-let properties. Your solicitor and/or accountant will be able to advise on the most appropriate business structure on a case by case basis. They will also be able to offer guidance on the financial implications of each scenario in greater depth, including the tax liabilities.
Due to the complexities of this area it is essential that you seek proper professional advice.
The information provided in this guide is of a general nature. It is not a substitute for specific advice on your own circumstances. You are recommended to obtain specific professional advice from a tax and legal adviser before you take or refrain from any action. Whilst we endeavour to use reasonable efforts to provide accurate, complete, reliable, error free and up-to-date information, we do not guarantee that it is such.
The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Jan 2017.
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