Should my Buy to Let property be owned personally or through a limited company?

‍Why do I read in the press that lots of landlords are using companies for Buy to Lets (BTL)?

The main reason that this method of ownership is often mentioned as an option for owning Buy to Let properties is due to the mortgage interest relief restriction for personal ownership that came into full effect from April 2020.

Prior to this, Income Tax was payable on your net rental income after deducting allowable expenses including mortgage interest. This meant that landlords paying higher (40%) or additional (45%) rate Income Tax could claim tax relief at their highest rate.

However, from April 2020 tax relief can only be reclaimed at the basic rate of Income tax (20%), whatever rate of tax the landlord pays. Companies are not affected by this restriction, so on the face of it they appear advantageous. However we need to look at what types of tax a company pays.

Corporation Tax

A company is a separate legal entity distinct from its owners so pays Corporation Tax instead of Income Tax.

Companies currently pay Corporation Tax at 19% on its profits if they are less than £50,000, and 25% if they are over £250,000 (Companies with profits between£50,000 and £250,000 may be eligible for Marginal Relief). Whereas Income Tax for individuals is 20%, 40% or 45% depending on the individuals level of income.

On the face of it, a company would get full relief for the actual mortgage interest paid as well as paying Corporation Tax at a much lower rate than higher rate income tax payers. But the net income belongs to the company and not the individual at this point.

Corporation Tax years run from 1st April to 31 March, so if your year end is 31st December for example, you will have 9 months taxed at one rate and 3 months taxed at another rate while the rates are reducing.

Corporation Tax is payable 9 months and 1 day after the year end if the company is deemed ‘small’, otherwise the tax is payable in 4 quarterly instalments starting 6 months after the year starts. This means that tax payments will have to be estimated with the risk of incurring penalties and interest if tax is underpaid. The definition of a small company can be found on the Gov.uk website.

A corporation tax return will need to be filed electronically with HMRC together with a full set of company accounts within 12 months of the year end.

Capital disposals

So what happens when a Buy to Let property is sold?

Companies do not pay Capital Gains Tax, they only pay Corporation Tax, so gains are taxed at 19% or 25% depending on the business profits. Individuals pay Capital Gains Tax on buy to let properties at 18% or 24% depending on their levels of income.

Unlike individuals, companies do not have an annual allowance for Capital Gains Tax. They do however have something called Indexation Allowance which you can claim from day of purchase to day of sale. This can help reduce any gain if the asset is held for a long period of time. If a loss is made on a capital disposal then it belongs to the company and can be offset against future years, as long as the rental business continues in the company.
Whether you’ll be better off as a Limited Company or an Individual in this situation will depend on your individual circumstances, how long you’ve owned the property and the amount of potential gain

For example - A Buy to Let property sold with a capital gain of £30,000.

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Gain on sale of £30,000

Company

Corporation Tax (for small business) at 19% = £5,700

Individual

Capital Gains Tax at 18%/24% after annual allowance of £3,000

 Individual at basic rate = £4,860

 Individual at higher rate = £6,480

‍So in this example both a lower rate payer is better off holding the property privately as an individual whereas higher rate tax payer would benefit from holding it in a limited company. But what about a larger gain?

Gain on sale of£150,000

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Company

Corporation Tax at 19% = £28,500

Individual

Capital Gains Tax at 18%/24% after annual allowance of £3,000

 Individual at basic rate = n/a as gain pushes into higher tax bracket

 Individual at higher rate = £35,280

In this example the company will pay a lower level of tax.

How do I get money out of the company?

Although on the face of it a company appears to pay less tax on the income and potentially less tax on capital gains, the net income (the cash) belongs to the company and not the individual. If the individual needs access to the cash then they need to get it out of the company.

Getting cash out of the company also has tax consequences which can negate any benefit of putting the Buy to Let properties in the company. To get the cash out companies can either pay dividends to shareholders or salary to staff/directors.

Dividends

These are payments to shareholders based on the number of shares they hold in the company. The dividend is paid after Corporation Tax has been deducted. The company will pay no further tax on a dividend made, however, they are taxable in the hands of the recipient shareholder.

From April 2024 dividend tax changed so as:

• All individuals can receive £500 of dividend tax free for the tax year 2024/2025

• There are three dividend tax bands: 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate)

This means that for a shareholder who receives £10,000 dividend who is a basic rate taxpayer will pay 8.75% on £9,500, 33.75% if they are higher rate and 39.35% for additional rate.

For example. If my Buy to Let properties generated £30,000 net income, I am a higher rate tax payer and took the cash out via dividends currently benefiting from £500 allowance.

As a Limited Company owner who pays higher rate tax

·       Net income generated - £30,000

·       Minus Corporation Tax at 19% - £5,700

·       Minus Income Tax on dividend of £24,300 (£24,300 - £500 dividend allowance x33.75%)  £8032.50

·       Net cash = £16,267.50

As an individual paying higher rate tax

·       Net Income generated - £30,000

·       Minus Income Tax at 40% - £12,000

·       Net cash = £18,000

In this example individual ownership is more advantageous. However, with full relief in the company for mortgage interest payments then the net income in the company maybe higher and therefore the net cash out may be higher in the company.

Salary

The alternative way of extracting cash from a company is to take a salary. Taking a salary out of a company means that you will have to register for PAYE for employers. This means that you will have to deduct tax and National Insurance and pay it on a monthly basis to HMRC. It will also involve operating the Real Time Information system (RTI) which means sending electronic data to HMRC every month on or before you pay your employees. Employers also have to pay Employers National Insurance which is 13.8% on any earnings currently over £758 per month.

For a higher rate tax payer, any income would be taxed at 40% and they would also pay employees NI. In addition, the company would bear employers NI at 13.8%. This can make it an expensive way of extracting cash from a company.

Other non tax considerations for owning Buy to Let properties in a company

Accounts will have to be filed with Companies House within 9 months of the year end (6 months if the company is a plc rather than a private limited). An annual return will also have to be completed each year and filed at Companies House, with penalties if the deadlines are not met.

The company may also need an audit if it does not meet the definition of small company as per the gov.uk website.

This will involve paying for a qualified firm of auditors to review the books and records and determine whether the accounts are a true representation of the company’s finances.

What happens if I want to sell the company?

Company rental property businesses are currently not automatically deemed as trading for tax purposes so may not qualify for certain trading company reliefs. The reliefs of note that this could affect are: 

Entrepreneurs relief - this can reduce Capital Gains Tax payable on the sale of shares in a company.

Rollover relief is not available – this means you cannot carry the gain and deduct it from the base costs of any new asset when bought within 3 years or 12months before selling the assets whose gain you want to roll over.

The test HMRC seem to use is how active you are day-to-day in the property business. However the case law is not clear on what tests you need to pass to ensure it is a trading business and not an investment company.

If you wish to think about claiming reliefs for trading companies you must obtain professional advice to ensure your particular circumstances may be considered trading.

Family members

There may be some scope for giving shares in the company to family members to utilise annual exemptions and basic rate bands but these can be subject to Capital Gains Tax and Inheritance Tax issues. Potentially these are exempt transfers bu independent tax advice should be sought before taking any such action. This will also require the lender’s consent, which could affect your ability to do this.
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I already own a property. Can I transfer it to a company I have set up?

Any transfer will be deemed to be at market value at the time of the transfer so Capital Gains Tax may be payable at the time of the transfer.

This example also assumes that the individual is a higher rate taxpayer and that the property has never been the owner’s main residence.

Both these charges will be a one off but need to be factored into the savings being made by changing to a company.

For example: A property originally costing £275,000 is transferred to a company at a market value of £350,000 crystallising a gain of £75,000.

Gain of £75,000

Tax payable CGT at 24% £17,280 (After £3,000 annual allowance)

Stamp duty payable £15,500 Payable immediately

Total tax payable £32,780

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.

Summary

Careful planning is required before transferring property to a company, as the initial costs may outweigh any benefits in the short term.

It might be more beneficial for new property purchases to be put into a company, however, 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 rental property into a company in the first place.

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


Disclaimer:

The information provided in this booklet is of a general nature. It is not a substitute for specific advice on your own circumstances. You are recommended to obtain specific professional advice from a tax and legal adviser before you take or refrain from any action. Whilst we endeavour to use reasonable efforts to provide accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. The information can only provide an overview of the regulations in force at the date of publication, and no action should betaken without consulting the detailed legislation or seeking professional advice.

Rates are correct at 6^th April 2024.