Pros and cons of using limited companies for buy to let properties

10th July 2017

Following the announcement to cut tax relief for landlords from April 2017, setting up a limited company to purchase investment properties has been suggested as one way to ease the burden of tax.

Whilst the legal transaction is essentially the same whether an individual or a company is purchasing the buy- to- let properties, there are different considerations for tax purposes:

Pros

  • Higher tax relief

From 2017 to 2020 the amount of mortgage interest tax relief for individual landlords will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. This change does not currently affect Limited Companies (although the rate of relief for companies is of course limited to the rate of corporation tax, which is currently 19% and is expected to fall to 17% by April 2020).

  • No tax is due on dividend withdrawals up to £5,000 – essentially you can receive £5,000 tax- free income from your Company
  • Profits retained within the company can be reinvested to secure further properties, with only Stamp Duty Land Tax to pay on the purchase, allowing more cash to be re-invested.
  • Full tax relief is available on mortgage interest payments
  • Personal funds introduced into the Company can be drawn out of the company by way of Directors Loan.

Cons

  • Dividends over £5,000 will be liable to tax. Basic rate tax payers will pay 7.5%, higher rate payers will pay 32.5% and additional rate payers will pay 38.1%
  • There is no Capital Gains Tax allowance when selling a property in a Company, although indexation allowance is available when calculating a company gain. Individuals selling a property have a £11,300 Capital Gains annual exemption (2017/18).
  • There are numerous additional costs associated with setting up and running a limited company, filing at Companies House etc.
  • Higher mortgage rates.

Many lenders will charge higher interest rates and fees for Limited Companies compared to individual buy to let mortgages.

  • Reduced choice of lenders and mortgages as many lenders do not offer mortgages to Limited Companies.
  • Cost of transferring existing investment properties from an individual name into a Limited Company structure is more complex than purchasing new properties, as Capital Gains tax and Stamp Duty Land Tax will need to be considered.
  • Certain landlords with investment properties worth more than £500,000 may also need to consider the added cost of Annual Tax on Enveloped Dwellings.

Each case is very much dependent upon the individual circumstances and we would suggest getting in touch with one of our Team at Whiting & Partners



 
Other items in Blogs
 
Stephen Malkin
21st January 2021 1-Mar-21: Are you ready for new VAT Domestic Reverse Charge rules for construction services?

VAT registered businesses working within the construction sector should be aware that new reverse charge VAT administration rules are being introduced wef 1 March 2021 (delayed from original October 2019 launch date). The Government announced in the 2018 Budget that they are trying to reduce missing trader fraud; where builders collect VAT from their customers…

Read More »

Richard Alecock
13th January 2021 Information on local business grants from West Suffolk Council

Find out the up-to-date information on local business grants from West Suffolk Council during the COVID-19 pandemic:   COVID-19 support for business – grants (westsuffolk.gov.uk)

Read More »

Jonathan Moore
8th January 2021 New lockdown grants to support businesses and protect jobs

On 5th January 2021 the Chancellor announced new one-off top up grants for retail, hospitality and leisure businesses worth up to £9,000 per property to help businesses through the new lockdown.   The one-off top-ups will be granted to closed businesses as follows:   £4,000 for businesses with a rateable value of £15,000 or under…

Read More »

Chris Kelly
8th January 2021 Wrongful Trading Liability Suspension – Renewed 26 November 2020

In March 2020 the Government temporarily suspended wrongful trading provisions until 30 September 2020.   The purpose of this measure had been to ensure that company directors could continue to operate during Covid-19 without worrying about becoming personally liable for wrongful trading.   On 26 November 2020, following the 2nd lock down, new legislation came…

Read More »

Jaimie King
4th January 2021 Coronavirus loan scheme deadline extended

On 17th December the government announced a further extension to the Coronavirus Business Interruption Scheme loans (CBILS) – meaning that businesses now have until 31st March 2021 (previously 31st January) to apply.   This welcome announcement means that more businesses will be able to enter the loan scheme, benefitting from the needed funds during these…

Read More »

Nick Edgley
18th December 2020 Don’t miss 31 January deadline for filing your Self-Assessment Tax Return

The New Year is approaching and so is the deadline for filing your Self-Assessment Tax return – January 31, 2021.  Our tax experts can ensure everything is completed accurately and submitted on time.   If you need help or advice with your tax return or any other accounting or financial matters, please contact your local…

Read More »