With mortgage interest tax relief disappearing, landlords who have a few buy-to-let properties could consider transferring them into a limited company. Â But is it worth doing? Jonathan Amponsah, CEO at The Tax Guys, explains the pros and cons
Mortgage interest relief for buy-to-let (BTL) landlords is changing, with the new rules being phased in between April 2017 and 2020.
Landlords will no longer be able to deduct all of their finance costs from their property income.  From 2020, you will instead receive a basic rate reduction from your income tax liability for your finance costs. So, if you incur £1,000 interest, you will only be able to claim £200 (20% x £1,000) off your tax bill.
However, this change doesn‘t apply to limited companies so many BTL landlords are now tempted to transfer their property into a limited company to continue claiming tax relief on all the interest and finance costs.
It’s an attractive proposition as a limited company will enjoy the tax relief that individuals are now losing, and any net profit will be taxed at the lower company tax rates of 20%.
But… you may find yourself landed with unnecessary tax bills and costs.
Pitfalls
Here are five common pitfalls to be aware of if you are considering a transfer to a limited company:
- Stamp Duty Land Tax. If you transfer the property from yourself to the company (effectively the company buys the property) then the company could become liable to pay stamp duty land tax. So while you reduce income tax, you may end up paying the same amount or more in stamp duty land tax.
- Capital Gains Tax. If you transfer the property to the company, this will be treated as if you’ve sold the property to the company. If the property has gone up in value since you originally bought it, you’ll have to pay up to 28% capital gains tax on the difference, subject to any tax reliefs and allowances. If you have a few properties to transfer, seek advice about a relief you could claim to defer your capital gains tax.
These two main tax pitfalls could potentially wipe out any short term tax savings.
- Your Mortgage. If your company needs a mortgage to buy the property from you then watch out as in most cases the interest rate is higher for commercial or company mortgages than it is for individuals. So, you could end up paying a lot more over the full term of the mortgage.
- Once the property is transferred, it is owned by the company, not the landlord. If something happens to the company, all its assets will be exposed including the property that you put in it.
- At some point in the future if you sell the property the company will pay Corporation Tax on the profits and the balance of the money from the sale will remain in the company.  In order to get access to the funds to enjoy you’d need to take it out of the company either as salary or dividends or other means. You’d then pay additional tax on that income. When you take the above into account the idea of transferring your BTL property into a limited company starts to sound rather bleak.
Benefits
But there are some situations where you can reduce or eliminate the pitfalls above and enjoy some of the benefits of holding your properties through a limited company.
- If you’re buying a new property then a limited company could be a good idea. But if it’s an existing property and you’re only managing one or two properties, I’d say: don’t bother. You’re better off paying just a little bit of tax now instead of triggering all these taxes and then having to pay additional double tax if you sell the property in the future.
- If you currently run your BTL through a properly arranged partnership business, then transferring into a limited company could be a good idea because some of the tax burdens above could be reduced.
- Legacy planning. Landlords who want to leave their BTL properties to their children could consider the pros and cons of a Family Investment Company as an alternative to a Trust.
Important decision
Clearly the message here is ‘don’t rush into it’. It’s extremely unwise to move BTL properties into a company without taking professional advice.
Whilst there’s no simple answer to the question and it all depends on your circumstances, as a general ‘rule of thumb’ I would say that if it‘s only one or two existing properties in your name, it‘s not a good idea.
If you‘ve got six to 10 properties, it might be worth your while to look at how you can enjoy the benefits of a limited company without triggering unnecssary taxes and costs.
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who has advised many clients over the last decade on property tax. Jonathan is the founder and CEO of The Tax Guys. He is also the co-founder of Easy Tax Returns (a tax return app to help tax payers avoid stress, penalties and find their peace).
Excellent article
welll done