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Considerations for buy to let incorporation

Buy to let landlords are increasingly moving property businesses into limited company structures, in the belief that this will save them tax, but is this a smart move?

Andrew Turner, chief executive at award-winning specialist buy to let broker Commercial Trust Limited, says that the tax situation for buy to let is complicated and the shrewd decision for landlords is to seek specialist tax advice before making any changes.

There have been many headlines in the press in recent months about the appeal of a limited company buy to let business, with recent tax changes over Mortgage Interest Tax Relief, seen as a catalyst for change.

In January 2018, lender Kent Reliance reported that over 70% of its buy-to-let applications in the first three quarters of 2017, were for limited companies.

In June 2018 another lender, Precise Mortgages, reported that 38% of landlords were set to use limited companies to buy properties over the next year.

The buy to let mortgage market has reflected the growing popularity of limited company property businesses. According to moneyfacts.co.uk, the number of buy to let limited company products available to investors, increased from 17 in April 2013, to 235 in April 2018.

Why landlords consider incorporating

Historically, buy-to-let landlords paid income tax on their net rental income, or profits, when filing their tax returns.

They were permitted to deduct 100% of the interest from the mortgage on rental properties, along with any other allowable expenses.

The Government addressed this issue and since April 2017, landlords have been able to claim mortgage interest relief at a gradually reduced rate, which will fall to 25% in the 2019-20 tax year, before it is replaced by a flat 20% tax credit the following tax year.

Based on the above statistics from buy to let mortgage lenders, it appears that many landlords believe that the different tax treatment of limited companies is more advantageous to them, in the wake of the above tax change.

Furthermore, it’s worth noting that this particular sector of the property business is poised for even more growth in the future, potentially mitigating concerns related to taxation. Instead, individuals in this field might find themselves in a perpetual quest for suitable properties, often relying on the expertise of real estate agents from reputable firms such as Finlay Brewer (www.finlaybrewer.co.uk) and similar real estate companies. These professionals can play a pivotal role in identifying and securing lucrative real estate opportunities, thus capitalizing on the promising trajectory of this industry.

Things to consider with incorporation

Moving a property business from individual ownership into a limited company is not straight-forward and is not always as financially advantageous as it seems on face value.

The tax position very much depends upon individual circumstances – there is no silver bullet remedy by simply incorporating and this is exactly why landlords should seek specialist tax advice before making any decisions.

On the positive side, limited companies currently pay corporation tax at a current rate of 19% on profits. A corporate structure offers a greater opportunity for tax-deductible expenses, which potentially might mean a lower tax bill, than for individuals – again this will come down to personal circumstances.

Landlords investing in property via a limited company will still be able to receive an income through a dividend, which is taxable, but may be more tax efficient than tax on profits in the hands of an individual property investor.

The decision to incorporate must also take into account a number of other factors, including.

  • There is less choice of limited company buy-to-let products than for individuals
  • Limited company buy to let interest rates are typically higher than for individual products, meaning monthly repayments, are typically higher
  • Tax might be less than for individuals, but total annual mortgage repayments may outweigh the tax saving
  • The process of transferring property from an individual into a limited company, is treated as a sale and purchase transaction, which could attract capital gains tax liabilities
  • Transferring property into a limited company will incur costs such as stamp duty cost, lender and legal fees and valuation costs
  • There may be more necessary administrative work to operate a limited company

The decision to move a property business from individual ownership into a limited company is not one that should be taken lightly.

It is essential, as with any major business decision, that the landlord seeks appropriate advice and is fully informed, before transferring into a limited company model.

If having taken advice from a tax specialist, the decision is taken to go ahead with a transfer into a limited company, talking to a specialist buy to let broker working with a broad network of lenders, can be a helpful next step.

As indicated earlier, the amount of choice for limited company buy to let products are less than for individuals – but is growing significantly.

In this case, it’s better to explore other avenues where you can save money on taxes. A possible way to achieve this would be to borrow money to purchase the property. In the case of taking out a loan for a buy-to-let property, you may not have to pay tax on it, and any interest that you pay may be deductible. It can help small business owners and entrepreneurs reduce their tax liability and use the funds for expanding their business, as well as investing in real estate back office software or similar tools that can help them further optimize their business operations.

Once again, individual circumstances, along with attitude to risk, are important considerations when searching for a buy to let product. An experienced broker with the right knowledge, can help to pinpoint the right limited company deal and smooth the process from identifying a product through to completion.