Tax Consultant, Spofforths
With all the changes being imposed on property taxes for landlords should I consider setting up a limited company as opposed to owning property personally?
This is a difficult question to answer as the use of a company can have some benefits but there are costs associated as well as more compliance to adhere to.
The new ‘mortgage interest relief’ rules will not impact residential properties owned in a corporate structure, so there are potentially some savings to be had by owning a property in a company - all interest costs can be used to reduce the profits subject to tax.
A company is also subject to a lower tax rate - currently Corporation Tax rate is 20% for all companies, being reduced to 18% by 2020/21. This compares with current income tax rates of 20%, 40% or 45% for individuals.
A company can also benefit from an adjustment for inflation, called indexation, on the sale of rental properties, potentially reducing the overall tax position when properties are sold.
Where companies own residential property with a value of £500,000 plus, there is a potential increase in Stamp Duty Land Tax (“SDLT”) rates both on purchases (a 15% rate can apply) and through the Annual Tax on Enveloped Dwellings (ATED) - an annual charge based on the value of the property. Reliefs can be claimed for both of these where the rental properties are being let to unconnected persons, for full market rent, but whilst the higher charge may not apply, there is additional paperwork to be completed each year.
To determine the right route for you, you need to understand your longer term investment aims. There is a two-stage tax charge on profit extraction from the company due to (1) the company paying tax on its profits or gains and then (2) the individual shareholder paying tax on the distributions being made.
If you already own properties, the cost of transferring them into a company can be significant: Capital Gains Tax is potentially payable on the transfer of the property to the company, SDLT may be due on the market value of the properties concerned, and mortgage lenders will need to agree to transfer the liabilities to a new ownership structure.
For some individuals, the costs associated with transferring properties into a company are bearable given the reduced tax liability in the company going forwards. However, you should consider not only the costs involved but also your longer term investment strategy before making the final decision.
Spofforths Tax Consultancy Team
Tel: 01403 253 282
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