Residential property portfolio – is a company the best solution?

Ralph Mitchison - Menzies Accountant

Ralph Mitchison – Property & Construction Specialist

In the wake of the Government’s announcement in July 2015 that mortgage interest relief would be capped at 20% for individual landlords, brokers have reported a surge in buy-to-let mortgage applications by limited companies.

Many of these applications have come from an increasing number of individual landlords seeking to incorporate their existing property rental businesses or acquire new properties via a company.

The finance cost restrictions that are being phased in from 6 April 2017 only affect individual landlords. Corporate landlords are unaffected, meaning that they will still get full relief for finance costs when calculating taxable profit. Corporation tax rates are also set to decrease to 17% by 1 April 2020, meaning that corporate landlords will pay significantly less tax on their rental profits compared to individual landlords.

Based on this, the decision to own rental property through a company should perhaps be clear cut. However, as is often the case with tax, it’s not that straightforward and a company will not be the solution for all investors.

So when is a company the right answer?

Below are some key questions to ask yourself and then a detailed review should be undertaken:

Q1 – What level of finance costs are expected to be incurred?

An individual landlord with relatively low finance costs may actually pay more tax holding property in a corporate structure, particularly if the profits need to be extracted.

Q2 – Will profits need to be extracted from the company to live on?

If all or most of the profits need to be extracted from the company as a dividend, then due to the tax rate applicable, the individual is likely to lose any overall tax benefit from operating through a company.

Q3 – Can you obtain finance via a company?

Not all banks/lenders will lend to a property investment company and if they do, interest rates can be higher. This is a practical and commercial point that needs to be considered in more detail.

Q4 – Are you looking to transfer an existing portfolio or acquire new properties?

If you transfer existing properties into a company then upfront tax charges may arise. For most property owners, the transfer will trigger a capital gains tax (CGT) charge of 28% of the market value of the property, less original cost. In addition, the company is likely to incur a Stamp Duty Land Tax (SDLT) charge, including the new 3% surcharge. Reliefs from CGT and SDLT may be available but the facts would need to be carefully considered and some planning may be required.

Once any upfront costs are calculated this should be compared to the expected longer term tax savings and a comparison of the options reviewed.

high rise properly on yellow background

In summary, incorporation may not be the right answer for every buy-to-let property owner. As a general rule it will benefit highly geared landlords who can afford to leave profits to accumulate over the long term. However, we would recommend seeking a tailored tax forecast for your own circumstances before taking any action.

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