Transferring My BTL Property Into A Limited Company?

The rising popularity of serviced apartments attracts guests seeking hotel-like comforts while maintaining their privacy. To stand out among the competition and increase profitability, it’s crucial to enhance your marketing strategies for your multiple properties in town.

Deciding whether to transfer your properties into a limited company isn’t a simple decision; it hinges on various factors specific to your situation. If you or your spouse are not higher-rate taxpayers, the potential tax benefits of holding your property in a limited company may be limited, unless it’s part of a broader inheritance tax planning strategy.

However, it’s essential to weigh the potential advantages against the costs and complexities involved. Transferring property from a personal ownership to a limited company can incur significant expenses, including legal fees, stamp duty, and potential capital gains tax liabilities. Additionally, ongoing administrative requirements and tax obligations associated with limited company ownership need to be carefully considered.

Despite the potential tax advantages of holding properties in a limited company, it’s crucial to conduct a comprehensive analysis of your financial situation and long-term objectives. Seek advice from tax professionals and legal experts to assess the implications and determine whether this strategy aligns with your overall financial goals. Remember, the decision to transfer properties into a limited company should be made with careful consideration and a thorough understanding of the associated risks and benefits.

When is the right time for you to transfer properties into a limited company?

The primary advantage of transferring your property into a Limited Company lies in the lower Corporation Tax rate of 19%. However, if you’re already taxed at the basic rate of 20%, the potential tax benefit may not be significant, especially considering that property income isn’t subject to National Insurance contributions.

Why shouldn’t you transfer properties into a limited company?

Stamp Duty

Since your company is purchasing the property from you, it would incur stamp duty costs. Properties valued over £250,000 would entail stamp duty payments exceeding £10,000 per property.

Capital Gains Tax

Once more, if you’re selling your property to your limited company, Capital Gains Tax applies to the profit you’ve made. Unfortunately, the property must be sold at market value. For higher rate taxpayers, Capital Gains Tax stands at 28%. However, there’s potential relief known as incorporation relief (under s162 Taxation and Chargeable Gains Act 1992). This designation by HMRC considers your property as a business rather than an investment, delaying Capital Gains Tax until the property is sold to another party. To qualify for Incorporation Relief, certain criteria must be met:

Involvement in property management for at least 20 hours per week.
Personal selection of tenants, rent collection, minor maintenance, and demonstrating that most income is derived from property.

However – don’t quit just yet!

When you transfer your property into a limited company, any equity you possess in the property is allocated to your Directors’ Loan. This loan represents the amount owed to you personally by the company. The intriguing aspect is that you can withdraw this sum from your company without incurring any tax liabilities.

For instance, let’s assume you’re dealing with a £200k property. If you had to pay £10k in stamp duty and £28k in capital gains tax (based on a previous purchase price of £100k), and your equity in the property amounts to £80k, the tax-free income accumulated in your Directors’ Loan would be £80k. For higher rate taxpayers, who face a tax rate of 40%, this translates to potential tax savings of £32k.

In essence, these tax-free withdrawals almost offset the stamp duty and capital gains tax payments. Furthermore, if you manage to avoid capital gains tax altogether, the tax savings from transferring the property to a limited company become even more substantial.

If you’re a higher rate taxpayer and have carefully considered the implications of the aforementioned points, and you’re still contemplating the transfer of your property to a limited company, it’s worth delving deeper into the details.

Is it better to transfer property into a limited company if you are a higher rate tax payer?

For higher rate taxpayers with multiple buy-to-let properties, placing them within a limited company can seem beneficial. This arrangement subjects property income to corporation tax at 19%, a potentially lower rate compared to personal income tax rates. As the company legally owns the property, the property income is classified as revenue, with deductions for property costs to calculate the net profit taxed at the corporate rate.

However, accessing this property income personally triggers additional taxation, complicating matters. If you intend to utilize the property income for personal expenses or investments, you face a secondary tax liability, adding to your financial obligations.

In essence, if you opt to retain the income within the limited company for reinvestment purposes, foregoing personal withdrawals, significant tax savings can accrue. By continually reinvesting profits into property acquisitions, you maintain a tax-efficient approach, benefiting from the lower corporation tax rate. Additionally, leveraging lower tax bands through salary payments to family members can further optimize tax efficiency, especially if they fall within lower tax brackets or have unused personal allowances.

What is a drawback of transferring your property to a limited company?

The challenge arises when considering personal withdrawals from the company’s earnings. Despite the corporation tax paid at 19% on property profits, the funds remain within the company’s ownership. Should you seek to access these funds for personal use, you encounter additional taxation, resulting in a double tax imposition. This scenario holds unless you can leverage lower tax bands through family members, as discussed earlier.

Following the payment of Corporation Tax, higher rate taxpayers face Dividend Tax liabilities upon personal withdrawals. The tax-free threshold for dividends is £2,000, with subsequent amounts subject to taxation at 32.5% up to £150,000. Earnings surpassing this threshold incur a higher tax rate of 38.1%.

In practical terms, accessing property-generated income entails significant tax implications. The combined burden of Corporation Tax and Dividend Tax upon personal withdrawals can substantially diminish your earnings.

Is it better to transfer property into a limited company if you are a higher rate tax payer?

For higher rate taxpayers with multiple buy-to-let properties, placing them within a limited company can offer tax advantages. Corporation tax at 19% (2021) applies to property income, reducing taxation compared to personal rates. However, accessing this income personally incurs additional taxation, necessitating careful consideration.

Optimal tax efficiency is achieved by refraining from personal withdrawals and reinvesting income within the company. This approach ensures taxation at the lower corporation tax rate rather than personal rates, potentially halving tax liabilities. Leveraging family members’ lower tax bands for salaries can further enhance tax efficiency, particularly if their personal allowances remain untapped.

In summary, continual reinvestment of property income within a limited company offers substantial tax savings for higher rate taxpayers. However, the decision hinges on the balance between wealth accumulation and personal income utilization, a topic explored further in the following section.

What is a drawback of transferring your property to a limited company?

The challenge arises from the fact that the company is subject to corporation tax at 19% (2021) on property profits, yet the funds remain within the company. Accessing these funds personally incurs additional taxation upon withdrawal, unless lower tax bands of family members are utilized.

Following corporation tax, higher rate taxpayers face dividend tax on withdrawals. The initial £2k is tax-free, but subsequent earnings up to £150k incur a 32.5% tax rate, with a 38.1% rate applying to earnings beyond £150k.

In essence, utilizing property income personally entails significant tax implications, including both corporation tax and dividend tax.

Another tax benefit

Mortgage Interest

The situation stems from the company’s liability for corporation tax at 19% (2021) on property profits, while the funds remain within the company. Drawing these funds personally incurs further taxation upon withdrawal, unless family members’ lower tax bands are utilized.

After corporation tax, higher rate taxpayers face dividend tax on withdrawals. The initial £2k is tax-free, but subsequent earnings up to £150k are taxed at a 32.5% rate, with a 38.1% rate applying to earnings beyond £150k.

In summary, utilizing property income personally involves significant tax implications, encompassing both corporation tax and dividend tax.

Other very important (negative) things to consider when transferring property to a limited company

Expensive Mortgages & Finance Charges:

Limited company mortgages often come with higher costs, a factor worth considering. Finance charges to mortgage providers arise due to the mortgage being in a different name. Additionally, early repayment charges on existing mortgages may apply.

Ownership

Transferring property ownership to a company poses challenges. Even with full ownership, retrieving the property in case of legal issues, like lawsuits against the company, is complex. Legal counsel is advisable before proceeding.

Selling the property under company ownership entails corporate tax obligations on profits (19% in 2021). Personal access to these proceeds involves additional taxation like dividend or income tax.

Operating a limited company incurs extra administrative expenses, including heightened accountant fees for compliance with Companies House and other regulatory requirements.

Conclusion

If you’re not a higher rate taxpayer, transferring your property to a limited company offers no real benefits. Instead, you’d face significant drawbacks, including hefty Capital Gains Tax and Stamp Duty upon the company’s property purchase.

Furthermore, property ownership under a limited company entails higher taxes upon sale and potentially elevated mortgage rates. However, transferring property ownership could convert your equity into Tax-Free Income via a director’s loan, offering tax savings for higher rate taxpayers.

Assuming you’re comfortable with these implications, the crucial consideration lies in how you intend to utilize your property income. Your approach to utilizing this income will ultimately shape the feasibility and benefits of transferring property ownership to a limited company.