Property investment remains popular with many investors. With changes to how residential properties are taxed, many buy-to-let landlords are considering whether it’s worth holding properties in a limited company, especially as mortgage interest relief was phased out in 2020.
Holding property in a limited company means they will be assessed differently for tax compared to when they are owned personally. There are several factors to consider when deciding whether to hold property in a limited company, these include your personal tax position, the length of time you intend to own the property, whether you plan to take a salary from the income generated and how capital gains are treated when properties are sold.
Holding residential property personally
Many investors who hold buy-to-let property personally may have been pushed into a higher tax bracket with the changes to get a Mortgage Interest Relief in 2020. For some, typically with several properties, this means holding them in a limited company may be beneficial.
Transferring properties already owned from personal ownership into a limited company is also likely to trigger additional costs, such as Stamp Duty Land Tax, Capital Gains Tax, re-mortgage fees and legal fees. This means future tax savings need to be weighed up against the initial set-up costs.
Holding properties within a limited company
Owning property within a limited company can bring tax benefits, as limited companies are permitted to offset business rates relief and profits are not liable for Income Tax or Capital Gains Tax, instead of being subject to Corporate Tax, which is currently at 19%.
This can be beneficial if you do not plan to take a salary out of the company, or the income you wish to take out of the company is limited and you intend to reinvest some or all of the profits generated. If taking a salary out of the company is required, you should be aware that the tax implications of this will depend on your personal circumstance.
Additional costs in setting up a limited company
There are additional costs to consider when setting up a limited company for buy-to-let properties. These can include legal fees, ongoing accountancy fees and potentially higher interest rates for mortgages.
John McCaffery, Tax Partner and Head of Tax at Alexander & Co commented “Placing residential investment properties into a limited company can bring tax benefits compared to owning them personally. Typically, these are often only realised once a certain number of properties are held within a company. This will depend upon the level of rental income and other individual circumstances, but this is always worth exploring and seeking professional advice as to how it could benefit you.
“When properties are already owned and are placed into a limited company, the extra costs involved (that otherwise would not apply) in moving them also need to be weighed up against any potential future tax savings, making professional advice even more important.”