Should I Transfer My Buy-to-Let Properties to a Limited Company?

Are you thinking about whether it’s worth transferring your buy-to-let properties to a limited company? There are pros, sure, but there are also cons to consider.

This guide looks at the good and bad sides of buying rental properties through your own company. If you only have a few properties, it might not be worth it. But if you’re sitting on a big portfolio, it could make a real financial difference.

Keep reading to see if paying yourself in dividends through a company is a smart move tax-wise, or if the hassle of setting it all up isn’t worth it.

1. Buying property through a limited company
2. Transferring a property to a limited company
3. Pros and cons of incorporating your properties into a limited company

Buying property through a limited company

When you switch to a limited company, it affects how you purchase new properties. Plus, you’ll need to transfer ownership of your existing properties to the company.

While you might save on annual taxes, remember to consider the costs of transferring properties to the business – there could be unexpected tax issues along the way.

Setting up a limited company also comes with its own costs, which we’ll discuss in more detail below.

Transferring a property to a limited company

Moving your property into a limited company is not a cheap or straightforward process. You must sell each property to your new company, which can generate high costs:

Stamp duty: Your company will have to pay stamp duty when buying the property. As of April 2024, it’s calculated as follows: 0% for the first £250,000, 5% for the portion between £250,001 and £925,000, 10% for the portion between £925,001 and £1.5 million, and 12% for anything above £1.5 million. You usually pay 3% on top of these rates if you own another residential property.

Multiple Dwellings Relief: The government has decided to abolish Multiple Dwellings Relief, effective from 1st June 2024. This removes a partial stamp duty relief for those buying more than one house in a single transaction.

Capital gains tax: If the market price is higher than your original purchase price, you are personally liable to capital gains tax of 18% or 24%, depending on whether you are a basic or higher rate taxpayer.

Some other costs you need to consider:

• You may need to pay an early repayment fee if you’re switching from your current personal buy-to-let mortgage.
• There will be finance costs linked to the company applying for and securing a buy-to-let mortgage for the property. Also, remember that limited companies generally have fewer options for buy-to-let mortgages, which could mean higher interest rates.
• Legal fees will also come into play for transferring properties, updating the land registry, and so on.

It’s important to calculate the overall cost of transferring all your properties to a company. Only then can you determine if any potential tax savings in the future will outweigh these expenses.

Pros and cons of incorporating your properties into a limited company

Income tax vs corporation tax

The main difference between managing your property personally or through a limited company lies in the ongoing tax responsibilities. When you manage property personally, any profits from your enterprise will be subject to income tax.

In recent years, owning a buy-to-let property has become less profitable due to changes in government policy. Previously, you could deduct mortgage interest from your rental income for tax purposes, but that’s no longer the case.

For higher-rate taxpayers with a sizeable buy-to-let portfolio, this shift makes a limited company a more appealing option. A company doesn’t pay income tax on rental income; instead, it pays corporation tax on profits.

With corporation tax starting at 19% the tax burden is considerably lower than the 40% income tax rate paid by landlords falling into the higher-rate tax bracket (don’t forget, your rental income gets added to any other income you earn). Additionally, businesses can deduct mortgage finance costs as a business expense.

However, there’s more to consider. Managing a property portfolio is ultimately about generating income, which also carries tax implications.

Directors of a limited company can receive a share of company profits as dividends. While dividends are more tax-efficient than income tax, it’s important to remember that you still pay tax on dividends on top of the corporation tax liability.

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Dividend tax rates

The first £500 of dividends are tax-free. After that, basic-rate taxpayers are subject to an 8.75% tax rate, while higher-rate taxpayers face a 33.75% rate on earnings exceeding the £50,271 annual threshold.

Given these factors, if you’re contemplating purchasing a buy-to-let property through a limited company, it’s essential to calculate whether you’ll incur higher taxes as an individual or as a company subject to corporation tax, along with individual dividend tax.

Limited company administration and red tape

Being a director and running a limited company comes with a heap of responsibilities, like keeping meticulous records and staying on top of bookkeeping.

While this might seem like a hassle, an accountant typically handles these tasks on your behalf. There’s an initial setup cost for launching a limited company, and you’ll also need to cover ongoing expenses for bookkeeping, corporation tax return filing, and annual accounts submission to Companies House.

In general, annual accounts are more complex than personal tax returns, leading to extra costs and potential fines for late filing.

Selling properties

If you sell a buy-to-let property held by a company, the proceeds stay within the company. While companies aren’t subject to capital gains tax (assuming the property has increased in value), any profit from the sale is liable for corporation tax.

In contrast, selling a buy-to-let property as an individual is simpler – you’ll pay capital gains tax on any increase in value, but the remaining amount is tax-free.

When you are a company director, you will have to access the property sale proceeds via dividends, which are taxed. 

Regaining ownership and inheritance of properties

In the future, you might want to turn one of your properties into your own home or downsize your portfolio, making the limited company setup no longer suitable. What happens then?

Just as there are costs involved in transferring property from your ownership to a company, there are costs when you reverse the process. The limited company will need to settle its finances, possibly incurring expenses. Then, you’ll need to arrange your own residential or buy-to-let mortgage for the property and pay any applicable stamp duty.

Inheritance planning is also a complex topic. If you pass away, your family might not automatically inherit your properties or be able to live in them easily, especially if they are rented out.

Although your beneficiaries may acquire shares in the company, they’ll still need to navigate the process of transferring the properties into personal ownership if they wish to reside in them.

In any case, seek professional advice…

It makes sense that managing buy-to-lets through a limited company would be more attractive to landlords with lots of properties, as it could mean paying less tax.

But if you own fewer than five properties, going down the limited company route might not be the most suitable approach.

Just remember, everyone’s situation is different. So, before you decide anything, do your research and chat with your financial or tax adviser.

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