Post the budget, as there was a redemption on tax for interest on BTL (Buy-to-Let) mortgages, there has been a tremendous increase in landlords purchasing Buy-To-Let (BTL) investments under the name of the limited company rather than their personal name. Many property investors are choosing this route to structure their rental business for greater tax efficiency and professional credibility. This also changed the cut-off of the net rental income on which the mortgage interest was calculated. Initially the rule meant that the higher taxpayers could actually claim relief at a higher rate of 40-45 percent, which post 2017, for the next 4 years reduced to 20 percent. Limited companies can now claim mortgage interest as a business expense, whereas individual landlords receive a basic rate tax credit instead of full tax relief on mortgage interest payments.

Designed to let out on rent, for BTL properties a specific mortgage loan has been designed. While there are two ways through which buy-to-let property can be owned, one through using the personal name and the second through a limited company. Transferring property from personal ownership to a limited company involves significant tax implications, including the need to pay stamp duty land tax and potentially pay capital gains tax liability on any increase in market value since the property was originally purchased.

Reason for growth in the limited company

For a limited company, income tax is never paid as a single entity rather is paid as a corporation tax. This corporation tax was at 19 percent in the year 2017, at present it is 18 percent and until April 2019 it will be reduced till 17 percent. Therefore, investing in BTL property through a limited company is much more beneficial in comparison to investing it under a personal name as there are tax advantages for sure that a limited company can provide for a BTL property. Companies pay corporation tax on company profits, which can result in tax savings and improved tax efficiency, especially for higher rate taxpayers. However, companies do not benefit from the capital gains tax allowance available to individuals when selling investment properties, and instead pay corporation tax on any gains.

There are many more advantages in investing through a limited company.

• A £2,000 tax-free dividend allowance is being given to individuals since April 2016, which ends up providing a tax-free dividend income from the property that has been invested in.
• If you decide to re-invest the earned profit, you won’t need to pay any income tax if you choose a limited company. While the corporation tax is payable on trading profits, but it is lower than higher income tax rate. Leaving rental profits within the company can improve tax efficiency for higher rate taxpayers, as company profits are taxed at the corporation tax rate rather than personal income tax rates.
• When investing through a limited company, it is important to file annual accounts and a corporation tax return with Companies House and HMRC to ensure compliance with legal and tax obligations.

Major reasons for not doing investment through limited companies

Despite the fact that you can get tax redemption, there are certainly other factors that needs to be taken into consideration before investing in BTL property through limited companies. Limited company mortgage options are available, but they often come with higher interest rates and fees compared to personal buy to let mortgages. Engaging a mortgage broker can help property investors secure the most suitable buy to let mortgage for a company buy to let arrangement, as brokers have access to a range of limited company mortgage products and can advise on eligibility and finance costs.

Questionable tax saving

How much profit a company will make is unpredictable and hence distributing the company profit to corporation tax for the purchase of invested property, and not giving any amount to its shareholders will not generate any form of tax saving if the owner falls under the category of the basic ratepayer. However in case if the investment turns out complete failure then no savings are there veritably in the form of tax. The tax implications and potential tax bill should be carefully considered, and it is advisable to seek professional advice or consult a qualified tax adviser before transferring property or making significant property purchases.

Capital gains tax issue

If the owner wishes to invest through limited company then he/she may lose out on ample of benefits that are available only under the personal name. In addition to this, when the respective property is sold out the owner may end up paying double tax as the company is supposed to pay on capital gain and furthermore if the owner wishes to extract the profit form company than again he/she is supposed to pay personal tax on gain arising or income.

Contractual risks

Although there is certain risk element involved in every business and investing in BTL property through limited companies increases the risk element little more. The owner can be sued up for acute negligence as the limited company shall not be entitled to following professional indemnity policy. If any legal action is taken against the respective limited company than owner may lose out on all the assets held by the company and entire business can come to standstill. Tax planning and understanding the tax liability associated with different ownership structures is crucial, as it can impact the overall profitability and risk profile of your rental property portfolio and investment properties.

P11D/Benefit for leisure issues

If any owner utilises any benefits that are personal in nature from the company’s ownership like going on holiday, occupation etc. than the person is entitled to pay the tax for benefit in kind. Contrary to this, no such taxes one has to pay if he/she owns the property personally.

Business climate

After IR35, came into the picture the settlement legislation (earlier known by name Section 660), has increased lot of norms and regulations for small-scale limited companies and has impacted in the form of the downfall of the average lifespan of single person Consultancy Company. In the scenarios where the owner wishes to completely dissolve the company than it can be a cumbersome task for him/her. Before the dissolution can take place, the property is supposed to be transferred out of the company so that capital gains can be crystallised. In addition to this, the owner has to bear stamp duty cost and other legal costs of transfer. The property must be transferred at market value for tax purposes, which may trigger a requirement to pay capital gains tax and stamp duty land tax.

This article does not constitute tax advice. Readers should seek advice from a qualified tax adviser or obtain professional advice before making decisions about property ownership or transferring property.

Summary of Pros and Cons for investing in BTL property through a limited company

Pros

• No tax on dividend exists for withdrawals up to £5,000.
• Relatively higher tax relief is there in comparison to investment with a personal.
• Mortgage interest payments shall be considered as a company.
• No income tax shall be applicable if reinvesting of profits is done in order to secure further properties.
• All sort of personal funds can be drawn back out of the company.
• Limited company mortgages are available for those investing through a company, though options may be more limited compared to personal ownership.
• Potential for greater tax efficiency and retention of rental profits within the company.

Cons

• Capital gain tax issues shall persist.
• Overhead and other transfer costs are increased.
• Higher mortgage rates as the majority of lenders will charge higher interest rates for limited comparison in comparison to the individual.
• Very few options available for lenders and mortgage as only a few lenders offer mortgages for limited companies. This ultimately increases the mortgage rates as very few options are available.
• Mortgage payments and interest rates may be higher for limited company mortgages compared to personal buy to let mortgages.

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