I'm a buy-to-let investor – could I pay less tax by setting up a limited company?
Different taxes apply to personal and corporate property investors. We look at which approach will maximise your profits
Investing in buy-to-let through a company could have significant tax advantages. Photo: Justin Sutcliffe
By Nicole Blackmore
Are you thinking of investing in a buy-to-let property? Setting up a company could limit your tax bill and make it easier to pass your investments to children or grandchildren.
You don’t have to own a vast portfolio of properties to benefit from a corporate structure. Just one is enough, and you’ll be able to reinvest the profits at a lower tax rate if you do want to add to your portfolio later on.
If you already own an investment property, however, transferring it to a company could cost more than it’s worth.
Geraint Jones, principal at taxation consultancy BKL Tax, sets out the personal and corporate tax rates that apply to buy-to-let investments and how best to use them to your advantage.
The tax you pay when you own properties personally
If you own buy-to-let properties personally the rental profits are taxed at your personal tax rate, which could be as high as 45pc, depending on your other income.
Any capital gains will be taxed at either 18pc or 28pc, or a combination of the two, again depending on the level of your taxable income.
The tax you pay when you own properties via a company
The main tax benefit of holding properties within a company is that the rental profits are taxed at 20pc if they are less than £300,000 a year. This allows profits to be reinvested in new properties at relatively benign tax rates.
So if you are looking to grow your portfolio it would be more tax-efficient to hold the properties in a company, not distribute any profits and use them instead to buy additional properties.
When you come to sell a property the capital gain will be charged at the corporation tax rate of 20pc.
There will also be a personal income tax charge if you wish to take money out of the company. This will be at your "marginal" tax rate – the highest level you pay. But if you take out a large sum in one year you could be pushed into a higher tax bracket.
When you want to close the company you could carry out a "members’ voluntary liquidation" of the firm, take out any excess money as a capital payment and pay tax at 18pc or 28pc. But corporation tax at 20pc of the gains would need to be paid first.
I'm already a landlord. How easy is it to switch my properties to a company?
It is not easy to transfer personally held properties into a company. Any transfer would usually be considered a disposal for capital gains tax purposes, so you could face a tax bill.
Secondly, there will be a potential stamp duty charge for any properties worth more than £125,000. This would probably make the exercise prohibitively expensive. Existing landlords would typically be better off retaining existing properties personally and buying any future properties via a company.
Would using a company enable me to avoid stamp duty?
Stamp duty (officially called "stamp duty land tax" or SDLT) applies to both personal and corporate investors.
Personal investors pay according to a sliding scale based on the purchase price of the property.
If you buy a residential property worth more than £500,000 in a company there is a 15pc stamp duty charge. However, if you can demonstrate that the property will be let out commercially to third parties then the rates as above will continue to apply.
What about passing properties to children?
If you want to give personally held buy-to-let properties to children or grandchildren there will be a capital gains tax charge calculated on the basis of market value.
The gift may be a "potentially exempt transfer" for inheritance tax purposes – in other words, there would be no IHT on the gift if you survive for seven years.
There are two types of transfer for IHT purposes: a "chargeable lifetime transfer" and a "potentially exempt transfer".
A chargeable lifetime transfer creates an immediate 20pc IHT charge if accumulated transfers within the past seven years exceed the £325,000 limit.
A potentially exempt transfer is not liable to IHT as long as the donor does not die within seven years of the gift.
If the properties were bequeathed the net value would form part of the deceased’s estate for inheritance tax purposes.
If you establish a company to buy rental properties you could make your children or grandchildren shareholders of the company. They would have to pay tax on any dividends, capital distributions or sales of shares.
If any children under the age of 18 received income from the company the parents would be liable for the tax due.
The company would have to pay tax on any rental profits, but as the value of the company rose the value of the beneficiaries’ shares would also rise. If a property is sold and the proceeds distributed to shareholders, the children or grandchildren could receive a distribution from the firm, which would be taxable as above.