L&C on whether you should put your buy-to-let property into a company

L&C on whether you should put your buy-to-let property into a company
The news is currently full of headline articles saying that buy to let (BTL) properties should now be held by a company.

This is because companies are not caught by the new rules coming into effect from April 2017 which restrict the amount of mortgage interest that can be deducted in calculating rental profits for tax purposes. This restriction is being phased in over 4 years.

Companies also benefit from a low rate of corporation tax, currently 20% reducing to 17% by 2020 whereas individuals are taxed at 20%, 40% or 45% depending on their personal circumstances.

Whilst it may be a very tax efficient way of holding property over the long term what many of these articles do not highlight is the cost of transferring existing BTL properties into a company. Any transfer will be deemed to be at market value at the time of the transfer so capital gains tax may be payable.

For example:

A property originally costing £175,000 is transferred to a company at a market value of £250,000 crystallising a gain of £75,000.

Of that £75,000 appreciation, you are entitled to £11,100 tax free, but the rest of it will be subject to Capital Gains Tax at 28%.

Therefore: £75,000 minus £11,100, then the resultant £63,900 taxed at 28%, leaves a total tax charge of £17,892 for flipping your property into a privately held company.

Stamp duty is also payable on any transfer. So a transferred property worth £250,000 will cost £10,000 in stamp duty, which is payable immediately.

Both these charges will be a one off but need to be factored in to the savings being made by changing to a company. As in the example above, the cost would be £27,892.

This example also assumes the following:
  • The individual is a higher rate taxpayer;
  • And that the property has never been the owner's main residence.

Also, the new lower rate of capital gains tax introduced in April 2016 does not apply to residential property.
Other costs that need to be considered are the compliance costs of setting up a new company, such as sorting out bank accounts, annual accounts and corporation tax returns.

Early repayment charges on current mortgages may also apply, as any mortgages will have to be taken out in the company's name rather than the individual.

Careful planning is therefore required as the initial cost in transferring BTL property to a company may outweigh any benefits in the short term. The mortgage interest restriction is taking 4 years to reduce to basic rate tax relief only, so landlords do have time to plan.

New BTL property purchases might, however, be more beneficial for tax purposes to be put straight into a company if the plan is to hold the property for the long term.

If the rental income is required for day-to-day living then you will need to consider how the income will be extracted from the company, because it may negate some or all of the tax savings you made by putting the BTL property into a company in the first place.

Furthermore, if a salary is taken out of the company then normal income tax at 20%/40%/45% would be payable. But the company would also suffer employers' national insurance, which is currently 13.8%.

It is therefore essential that tax advice is sought before rushing into setting up a property company.