Using a company to purchase a buy-to-let
As the new restrictions on loan interest relief for buy-to-lets take impact you might be thinking about transferring your properties to a limited company. Alternatively you could be starting a new property business. Therefore is using a company to purchase a buy-to-let property a good idea?
If you haven’t purchased a buy-to-let property, using a company from the start may be appropriate. A big advantage is that you won’t pay a second stamp duty charge on a transfer later on (see below).
If you are using your existing company to purchase a buy-to-let property proceed with care. Because if your company is registered for VAT this could either affect any future potential VAT claims or reduce the cash flow benefit of the Flat Rate Scheme
Let’s assume you are using a company to purchase a buy-to-let property, so what are the advantages?
You could view the company as your personal ‘money box’ which means the benefits are as follows:
- The money received from rental income can be kept in your company until it is needed, without triggering further tax charges.
- The retained rental profits can be invested in the company’s name and used to purchase additional properties.
- Corporation tax rates are lower than the top rates of income tax (currently 20% as opposed to 45%). This means the size of the pot will potentially grow more quickly than if a property was held in your own name.
- When you need access to company funds, you might be a non-taxpayer or basic rate taxpayer. However, the dividend tax, could affect your profit extraction from your property investment company.
Therefore any amounts taken from your company should be planned and controlled to ensure maximum tax efficiency.
You can see the cash flow benefit from this example below
An additional rate taxpayer (45%) holds a property making £17,500 profit each year. They will pay £7,876 (£17,500 x 45%) in tax each year. If the property is held in a company, the tax liability is £3,500 a year (corporation tax at 20% x £17,500). The tax saving of over £4,000 can be used to finance additional property purchases.
You could also use a company to purchase buy-to-lets and provide an income for other family members
Some key advantages of this are:
- You can use multiple personal allowances and basic rate bands
- You could use the company’s income to provide for expenditure in a tax efficient way – for example for university fees. This can be done by transferring a minority shareholding to one of your children and paying them dividends within the 0% band.
- Family members could be encouraged to take an active part in the running of the company.
- Control of the company could eventually be passed down to your children.
- Gifts of shares to family members will be Potentially Exempt Transfers (assuming they are bona fide). This could reduce your taxable estate for IHT purposes.
Depending on the circumstances the company structure could become complex. Therefore special attention is required to draft the company's articles. Any changes in ownership therefore need to be fully documented.
What if I want to transfer an existing buy-to-let property to a limited company?
The transfer will be potentially chargeable to capital gains tax. The downside being that HMRC deem the transfer to have taken place at the market value. This is even if no money changes hands. So you could end up with a capital gains tax liability if the market value on transfer is more than the original purchase price.
However it might be possible to hold over any capital gain. This would prevent any tax liability arising on the transfer to a limited company.
Stamp duty would also be payable by the company (the rates start at 3%) on the market value. It would not be payable on the amount of money actually paid for the property which may be less..
Therefore it probably isn’t beneficial to transfer a single buy-to-let property to a company, unless the rental yield is particularly high; however when you come to purchase your second or third property it may be far more relevant.
We hope this has clarified some of the issues surrounding using a company to purchase a buy-to-let property. However, if you do have any questions relating to any of the points raised simply email our friendly tax adviser firstname.lastname@example.org or give us a call on 01202 048696.