Using a company to purchase a buy-to-let
As the new restrictions on loan interest relief for buy-to-lets will start to take effect over the next few years you might be thinking about either transferring your property portfolio into a limited company structure or starting a new property business. Therefore is using a company to purchase a buy-to-let property a good idea?
If you haven’t purchased a buy-to-let property already, you might think about using a company structure from the start. A big advantage of doing things this way is that you won’t pay a second stamp duty charge on a transfer later on (see below).
If you are contemplating purchasing a buy-to-let property through your existing company, you should proceed with care. This is because if your company is registered for VAT this could have a negative impact by either affecting any potential VAT claims going forward or by lessening the cash flow benefit of the Flat Rate Scheme
Let’s assume you are using a new company to purchase a buy-to-let property, so what are the advantages?
You could view the company as your personal ‘money box’ which means the benefits are as follows:
- The money received from rental income can be kept in your company until it is needed, without triggering further tax charges.
- The retained rental profits can be invested in the company’s own name by using the monies to purchase additional properties.
- Corporation tax rates are much lower than the top rates of income tax (currently 20% as opposed to 45%), meaning the size of the pot will grow more quickly than if it was taxed and held in your own name.
- When and if you do need to access the funds from your company, you might be a non-taxpayer or basic rate taxpayer. However you should also be aware that the new tax on dividends introduced in the current tax year, could affect your profit extraction from your property investment company.
Therefore any amounts taken from your company should be planned and controlled to ensure maximum efficiency.
You can see the cash flow benefit from this example below
An additional rate taxpayer (45%) holds a property personally making £17,500 profit each year. They will pay £7,876 (£17,500 x 45%) in tax each year. However if the same property is held in a company, the tax liability amounts to £3,500 a year (corporation tax at 20% x £17,500). The tax saving of over £4,000 can therefore be used to help finance additional property purchases.
You could also use a company to purchase buy-to-lets and provide an income for other members of your family members
Some key advantages of this are:
- You can use multiple personal allowances and basic rate bands
- You could use the company’s income to provide for expenditure in a tax efficient way – for example for university fees. This could be done by transferring a minority shareholding to one of your children and paying them dividends within the 0% band.
- Family members could be encouraged to take an active part in the running of the company.
- Control of the company could eventually be passed down to your children.
- Gifts of shares to family members will be Potentially Exempt Transfers (assuming they are bona fide) and therefore could reduce your taxable estate for IHT purposes.
However, depending on the circumstances the company structure could become complex and special attention is required in order to draft the company's Articles and to fully document and register any changes in ownership.
What if I want to transfer an existing buy-to-let property to a limited company?
If you transfer any existing property to a company this transaction will be a potentially chargeable to capital gains tax. The downside of this is that HMRC will deem the transfer to have taken place at the market value even if no money changes hands. You could, therefore, end up with a capital gains tax liability if the market value when you transfer the property is more than the price you originally paid for it.
In some circumstances it might be possible to hold over any capital gain thereby preventing any tax liability arising on the transfer to a limited company.
Stamp duty would also be payable by the company (the rates start at 3%) on the market value not the amount of money paid by the company for the property.
Therefore it probably isn’t beneficial to transfer a single buy-to-let property to a company, unless the rental yield is particularly high; however when you come to purchase your second or third property it may be far more relevant.
We hope this has clarified some of the issues surrounding purchasing a buy-to-let property using a limited company. However, if you do have any questions relating to any of the points raised simply email our friendly tax adviser [email protected] or give us a call on 01202 048696.