Having the right company structure can save you money

by Gordon Campbell

November 2021

Having the right company structure for your property business can save you money if the correct one is chosen.

On this blog we look at the pros and cons of that and some ideas that you may not be aware of.

Choosing the right company structure for your property business is important.

Every investor circumstances are different so here is a summary to a complicated subject.

Please note: Alliance Property Group Ltd are not financial or tax advisers and any decisions and actions you take should be checked by an accountant and or tax adviser.

Background

As mortgage interest relief was finally phased out in 2020 for UK investment properties with finance and replaced by a tax credit, based on 20% of mortgage interest payments, buy-to-let landlords are increasingly considering whether to set up a limited company to hold their investment properties.

Why buy property in a Ltd company?

Holding them in a limited company will mean that they are assessed for tax differently, including being able to claim full mortgage interest tax relief. It is a complicated decision that requires detailed analysis to assess the most efficient way of holding property. 

Ultimately, the decision will be guided by: 

• How long you intend to own the property
• The likely amount of capital gains generated, if the property is going to be disposed of at a future date
• Your own income tax position
• Whether you rely on the income generated or wish to roll up the income for further investment.
  
  

What if I already own properties that are not in a Ltd company?

If you already have buy-to-let properties held personally, there is further consideration as they will need to be transferred from your personal ownership into a limited company.

This can trigger additional Capital Gains Tax, Stamp Duty Land Tax, legal fees and

re-mortgage/finance fees.

Reliefs may be available but if not and unless you intend to hold these properties as a long-term investment, these costs are likely to make the transfer cost prohibited.

Here are your options for owning buy to let property.

1. Personal Ownership 

With the changes to Mortgage Interest Relief that took place in 2020, the decision to hold a buy-to-let property personally has become much more complicated.

This change, resulted in a tax credit based on 20% of your mortgage interest payments, is pushing a lot of investors into higher tax bands.

For these investors, it may now be more prudent to hold these properties as limited companies.

If you are looking to dispose of the property in the future, you will be liable for Capital Gains Tax on any increase in value above the Annual Exempt Amount.

This is calculated at 18% of the increase, if the gain means you remain in the basic rate tax band or 28% for the higher rate tax band.

You only pay Capital Gains Tax on your overall gains above your tax-free allowance (the Annual Exempt Amount) which is currently £12,300 and certain costs can also be deducted, such as Stamp Duty Land Tax and allowable purchase and disposal fees.

2. Corporate Ownership

To own property through corporate ownership, the property will need to be purchased by a limited company (or transferred into one) where the investor(s) are directors and shareholders of the company.

Currently, limited companies can offset all mortgage interest relief and the profits generated are subject to corporation tax, rather than income tax.

This has the benefit of corporation tax currently being just 19%.

Furthermore, Capital Gains Tax is not payable for assets sold by a limited company.

This is a good option if you do not intend to take a salary out of your investments and intend to reinvest the profits in the company.

If you do need to take a salary or dividend out, further consideration needs to be given to this:

If you require a salary, then the most efficient option is part salary, part dividends and the structure and tax implications would depend on other incomes and investments held.

If a director receives no other or a low income, then they can earn a total salary, subject to normal tax rules, of up to £8,840 per annum with no liability for national insurance contributions or income tax.

Salaries paid are an allowable expense against company profits. 

Corporation Tax relief is also available for pension contributions from limited companies for the benefit of employee directors.

The limit you can contribute and still receive tax relief is currently 100% of your income, up to a maximum of £40,000 per tax year.

It may also be advantageous therefore to take part of the profit as pension contributions.

Additional costs associated with limited companies for buy to let properties

There are costs associated with setting up and running a limited company, as well as increased legal costs, due to the added layer of complexity involved.

Whilst these costs are not often prohibited, a good understanding of these is always recommended before deciding to utilise this option.

Mortgage costs may also be higher.

3. Joint Ownership

One other avenue to explore if you have a spouse or partner is joint ownership.

In this scenario, the profits can be split at least 50:50.

If you’re your partner or spouse has a low or nil income; this can bring tax savings. 

If you own the property as tenants in common rather than joint tenants, you may be able to elect for ownership not to be equally split, meaning that the owner with nil or lower-income has responsibility for most of the profits as is practical.

This is not always accepted by HMRC, so it always advised to take advice from a tax expert.

Summary:

Limited company for buy to let property

What may seem like a straightforward choice on the surface, the decision on how to structure a buy-to-let investment has many layers of complexities, based on personal circumstances and what you wish to get out of the investment.

What is right for one person, will not be right for another.

Because of this, it is always worth speaking to a property tax expert, who can discuss your own circumstances, and guide you through the various options available.

We have a accountant in our power team that has helped hundreds of international investors set up a UK company and ongoing advice and support when buying a property from Alliance Property Group

Please note: Alliance Property Group Ltd are not financial or tax advisers and any decisions and actions you take should be checked by an accountant or tax adviser.

Thank you for reading.

And remember…

If you have any questions or are looking for some advice on your next investment, please don’t hesitate to get in touch. We are always here for you.

Gordon and James

Alliance Property Group. Making a Difference