Take advice when buying residential property through a limited company

Buying residential property through a limited company or transferring a property to that company, can seem like a good way to save on tax, but a number of factors need to be considered.

It used to be the case that only a tiny minority of investors would buy a house through a limited company.

However, with changes to the accessibility of mortgage interest tax relief over the past few years, that number has grown substantially.

Under these changes, the majority of individual investors only receive mortgage interest tax relief at a rate of 20 per cent on buy-to-let mortgages, but limited companies continue to benefit from 100 per cent tax relief.

What’s more, if you are a higher rate taxpayer renting out a property as a private individual, you will pay up to 45 per cent of your rental income in tax, so it would seem to make sense to buy through a limited company, which incurs a lower rate of Corporation Tax – currently 19 per cent.

Some property investors buy the property and retain it as a long-term investment. In these circumstances, when a residential property is sold, the gain arising will usually be subject to Capital Gains Tax (CGT) of 28 per cent (2021/22) unless you are a lower rate taxpayer in which case you will pay the lower rate of 18 per cent.

However, the property disposed of via a limited company could benefit from Asset Disposal Relief (formerly known as Entrepreneur’s Relief), which could lower this amount to just 10 per cent if the right circumstances are met.

The current Stamp Duty Land Tax (SDLT) holiday, which is running from 1 July 2021 to 30 September 2021 at a lowered nil rate band of £250,000, will return to the standard amount of £125,000 on 1 October 2021.

The rate for a second home incurs a further charge, but there is still time to act and make savings by transferring properties into a limited company at a lower cost and benefit from mortgage interest relief.

The benefits seem obvious, but make sure you contact your accountant before making any move as they can guide you through the pros and cons.

A big advantage is that if you run your buy-to-let business as a limited company, it will be legally separate from your personal affairs, meaning that you aren’t personally liable for any losses.

Also, by making family members shareholders in your limited company you could also minimise the amount of inheritance tax they would face paying.

On the downside of buying through a limited company, you will incur costs associated with running that firm and have to deal with the Companies House rules and requirements.

Things to consider

Capital Gains Tax 

Unless you set up your company before purchasing your buy-to-let property, you will need to sell your second home for repurchase by your limited company. Doing this can trigger CGT if the value of the property has risen since its original purchase.

Stamp Duty Land Tax 

Stamp duty is also payable on the repurchase of the property. In addition, anyone buying a second home is subject to a three per cent surcharge on the rate of stamp duty owed, while overseas investors could face an additional two per cent surcharge on top of this if they are classed as a non-resident landlord.

Higher mortgage fees 

Changing the ownership of the property could also mean changing your mortgage if you have one. This could trigger early repayment fees as well as additional legal and valuation fees.

Costs of running a limited company

Once your company is registered you will need to prepare accounts and submit company tax and corporation tax calculations to HMRC. You may need the services of an accountant to complete these tasks.

For help and advice with residential property matters, please get in touch with our expert team today.