So, a limited company is a no-brainer?
It’s not that simple!
Say you hold only one property personally. To move it to a limited company, you have to sell it to that company. This means you have to pay the following on a property worth £300,000.
- Stamp Duty Land Tax at the higher rate. Your company will pay £14,000.
- Capital Gains Tax (residential property rate) of 18% if your total annual income is within the basic rate band or 28% if you are taxed at the higher rate.
- Finance costs of taking out a new mortgage for the company
- Early repayment charges (if relevant) on your existing mortgage.
You’re also unlikely to qualify for tax breaks such as incorporation relief and entrepreneurs’ relief because HMRC regards property as an investment rather than a trade or business. It’s also worth noting that limited companies don’t have such a large range of buy-to-let mortgages open to them, meaning you may have to settle for a more expensive deal. Also, when you take dividends out of your company, only the first £2,000 is tax free. Any dividends you take within your basic rate tax band are charged at 7.5%, rising to 32.5% when you hit the higher rate dividend band at £50,000.
That said, if you sell your properties to your company at market value, you could create a substantial Directors Loan Account – which can be repaid to you tax free over a number of years. Of course, if most of the property is mortgaged, the size of this loan account will be much smaller.
Also, don’t forget the additional admin and costs required to run a limited company – separate corporation tax, the possibility of tax inspections, potential audit costs (if your company is big enough) and so on.
As you can see, moving your property to a limited company quickly incurs major costs and can be a big commitment. Whether it’s a good plan to make the change in the long run, really depends on how much your portfolio is worth, how long you want to hold on to it and how much extra admin you want to take on.