Buy to Let Property

Investing in BTL Property Through A Limited Company, Is It Tax Efficient?

Investing in BTL Property

You can buy property through a newly incorporated or an existing company, but it is important to take expert advice before doing so and to ask the question, is it tax efficient?

If considering buying property through a limited company have you thought about the risk to your assets, cost, and the tax implications?

1. Existing company

Say that you manage to get a mortgage to purchase a BTL property through your existing trading company, have you considered that you could be exposing your assets to the risk of trade? Imagine that you want to close down your company: if you have property in the business, it will be tougher to wind up the business without disposing of the property, whereas if the property is not part of the trading company you can close down the company without worrying about the property.

2. VAT

If your existing company is on the Flat Rate VAT Scheme then you will also need to pay VAT on the rent charged, but this means you will operate at a loss because residential properties are VAT exempt, meaning you cannot charge VAT on the rent you charge.

3. A new company

Setting up a new company as a special purpose vehicle/entity (SPV/SPE) may be the answer, but a new company without any trading history will mean that when trying to secure a mortgage the loan may fall on the director or directors of the company. The lender may also request additional security such as equity in other properties, or a larger deposit.

Is BTL through the company a good investment?

There are some definite tax advantages to using a limited company to purchase BTL properties, but the importance of expert tax-planning advice cannot be over-emphasised. Bear in mind also that there is always risk, so the issue of risk should be topmost in your mind.

What are the advantages of using a Limited Company to purchase BTL property?

1. Tax relief

From 2017 to 2020, the amount of BTL tax relief individual landlords can claim will be progressively cut from a maximum of 45% to 20% for top rate taxpayers, but as this does not affect limited companies a top rate tax payer will pay less tax that she or he would on individual income.

2. No tax on dividends

The nominal rate dividends tax credit will be replaced by the tax-free dividend allowance of £5,000 for individuals from April 2016, which means potentially receiving tax-free dividend income from investment properties.

3. No income tax when re-investing profits

There is potential to re-invest profits through a limited company as no income tax is payable on retained profit. Corporation tax will be payable on trading profits (20% 2015/16, dropping to 18% by 2020), but it is lower than higher income tax rate (40% in band £31,786‒£150,000 in 2015/16).

4. Director’s loan

Personal funds can be drawn from the company, so if you loaned the company the mortgage deposit, say, it can be taken back through careful use of a director’s loan.

What are the disadvantages of using a Limited Company to purchase BTL property?

1. Loss of Capital Gains Tax (CGT) allowance

Limited companies do not benefit from the CGT allowance when selling property, while individuals benefit from £11,100 Capital Gain Tax allowance (2015/16).

2. Additional cost and potentially more paperwork

Running a limited company involves preparation of accounts, company tax, and corporation tax calculations to HMRC and filing accounts at Companies House. Legal fees, insurance, and other expenses should also be calculated.

3. Mortgage rates

Most lenders charge higher interest rates and fees for limited company mortgages compared to an individual obtaining a BTL mortgage. An additional 1‒1.5% interest should be allowed, and also cost in that the fees tend to be charged as a percentage rather than a fixed amount.

In addition, although the market is improving, there are fewer lenders offering mortgages to limited companies and they tend to have fewer products to choose from as well.

Transferring personal property to a limited company

Should you hope to avoid the hurdle of obtaining a limited company mortgage by transferring existing properties from an individual name into a limited company, there are complexities that might make you think again. For example, CGT and Land Tax (SDLT) will be due by you on the transfer and, in addition, your current mortgage provider will also have to agree to the transfer of loans to a company and may apply a higher rate of interest on the loan.

Conclusion

These are some of the pros and cons to consider before you make any decision to purchase BTL property through a limited company. Any decision you make should be supported by expert advice. While buying property through a limited company is marginally more expensive, is more complex, and carries an additional element of risk, it can still be beneficial, particularly for higher rate taxpayers who choose not to take salary or dividends from the company, and seek to reduce their tax liability from 40% personal tax to 20% corporation tax.
Basic rate taxpayers on the other hand should consider this option cautiously because they stand to win the least from buying property through a limited company.

About the Author:

Sumit Agarwal
, A specialist accountant and tax adviser for freelancers, contractors and small businesses since 2005, He is an expert in business growth and development strategies. A renowned tax expert for owner managed businesses and contractors, He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.