I am a buy-to-let investor: will I pay less tax if I set up a company for my properties?
08-22-2015
By Linda Mckay for Thisismoney.co.uk
Shelter: The reader asks whether she should put her buy-to-let property in a company structure
As a small buy-to-let investor would I be better off after the Budget changes setting up a company for the rental income from the properties?
If the answer is ‘yes’ does this mean I still own the flats and can sell as I please or does the company then own the flats and they are technically no longer mine?
A.B.
Linda Mckay, of This is Money, replies: Currently property investors like you can claim mortgage interest tax relief on their monthly interest repayments at the top level of tax they pay, meaning a top rate taxpayer can claim as much as 45 per cent.
However Chancellor George Osborne cut the mortgage interest relief for buy-to-let landlords in his recent Summer Budget. It will be restricted to the basic rate of income tax and phased in over four years from April 2017.
For higher or top rate taxpayers, the change could result in a considerably higher tax bill. However, one option considered by buy-to-let landlords to mitigate the loss is setting up a company.
I asked one of our experts for some help.
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants, replies: The Chancellor’s interest tax relief restriction may indeed prompt some landlords to consider transferring their buy-to-let property portfolio to corporate structures, which continue to benefit from relief on mortgage interest payments at the moment.
The short answer to your reader’s problem is ‘Yes’ - a corporate structure would now be better, but this loophole is set to be closed in the near future.
Furthermore setting up a company would only be beneficial to those who have a portfolio of properties rather than just one, and is a better option for those planning to hold on to properties over the long term.
To Let signs adorn houses in the Selly Oak area of Birmingham on November 21, 2007 in Birmingham, England. Buy-To-Let mortgage provider Paragon suffered further share price set backs today as its funding difficuties sent the stock tumbling a further 21%. The mortgage group's shares have lost more than half their value since news it may have to turn to shareholders for emergency funding and could close to new business if it cannot secure new credit. (Photo by Christopher Furlong/Getty Images)
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What is the advantage of a company structure?
The advantage of incorporating the properties into company ownership is there are reliefs to allow for tax-free rental income.
Buy-to-let landlords also benefit from this tax relief even if they are not operating through a company structure.
However within five years it will be restricted to just 20 per cent taxpayers. Those who are 40 per cent or 45 per cent taxpayers will therefore lose some of their tax relief.
Operating through a company can potentially keep the tax relief by separating the property rental income from regular PAYE income.
Instead rental income would be considered business income and once the property or properties are within a corporate vehicle they benefit from full relief for loan interest.
However, unlike normal buy-to-let, companies are liable for corporation tax on income at 20 per cent today and reducing to 18 per cent over the next five years.
If you do go ahead, you must also be careful to do it correctly otherwise you could trigger a large capital gains tax liability on the property if you need to sell. The property would then end up being treated as a disposal by the company.
Have a careful read of the following government guidelines on company disposals of property
https://www.gov.uk/tax-when-your-company-sells-assets/overview
I foresee two problems for you should you take this route in the short term. You will need to transfer the properties into the company ownership. Such corporate structures come with costs for legal set-up and administration fees. You would need to name yourself as sole director thereby retaining the ownership of the properties should you as company director have to sell. This procedure may take some months to put in place.
Maximising returns: The reader is concerned about increasing the profitability of her buy-to-let property
Secondly, to draw any money out of the company you will have to do so by way of a dividend and that will be taxable after the new standard of £5,000 allowance comes into force next year. Basic rate taxpayers will pay 7.5 per cent tax on any additional dividend income, higher rate taxpayers will pay 32.5 per cent and additional rate taxpayers 38.1 per cent.
I would warn that these tax rules could be changed by the Government in future. In any instance, the way forward would be some professional accountancy help before taking action due to the new inheritance tax rules also announced in the Budget as company ownership of the properties would not give you this extra allowance.
Linda Mckay adds: For those considering entering the buy-to-let market rather than those who are already landlords there are considerations to setting up a company - or a special purchase vehicle (SPV) - to own the properties.
Using a company or SPV you can have as many properties as you want within it making it a flexible option to build a portfolio.
The company will own the house or flat, but the directors can be changed relatively easily with few tax implications, (although there could possibly be inheritance tax liabilities). So you can add or remove directors to suit your situation.
One disadvantage is the changes made to stamp duty land tax rules in the 2014 budget. You will pay 15 per cent tax on all purchases over £500,000; below this standard stamp duty applies: 1 per cent for properties up from £125,000 to £250,000, and 3 per cent on properties from £251,000 to £500,000.
There are only a few lenders who will consider a SPV purchase, and these tend to be the more specialist BTL or commercial lenders. Professional advise should be sought before entering any purchase as this is a complicated issue.