By Lynne Gowers on 2nd October 2017

Is now the time to incorporate my buy-to-let business?

In April 2017, the government introduced significant changes to the way buy-to-let investments are taxed. Since then, we have had a lot of enquiries from landlords wondering if now may be the right time to incorporate their property business in order to avoid the new restrictions, which only apply to personal income tax.

What changed?

Buy-to-let investors are now unable to offset all of their mortgage interest and other costs on loans against their profits – effectively meaning higher tax bills.
Tax relief will now be restricted to basic rate (20%), with the restrictions being phased in over four years.

This useful video, created by the Telegraph, explains the buy-to-let tax relief changes really clearly.

To incorporate or not?

The change only applies to private individual landlords and not to those who own property through companies, prompting many landlords to consider incorporating their property business.
However it isn’t a decision to be taken lightly.

Landlords should carefully weigh up everything involved with running a limited company in the context of their own individual circumstances and long term plans. Here are some of the tax implications to consider:

  • Even with the new restrictions, individuals still get tax relief at 20% on their mortgage interest payments as opposed to 19% for companies.
  • Although corporation tax rates are low, there will be additional tax to pay when profits are extracted.
  • The current dividend tax allowance stands at £5,000, but the government has proposed reducing this to £2,000 in the future, possibly from April 2018.
  • The level of tax savings will depend on the income you need to draw from your property business – the tax payable on large dividends may cancel out any other tax savings.
  • However, if profits can be retained within the business, incorporating your business might be more tax efficient.

Transferring existing properties into a company

Landlords also need to consider the tax charges associated with transferring their existing property portfolio into a company:

  • It will be treated as a market value disposal for Capital Gains Tax which it will attract at the higher rates of 18% / 28%.
  • HMRC might view property letting as an investment, rather than a trade or business, which means you will not be granted the likes of incorporation tax relief, Entrepreneur’s relief or gift relief.
  • There might also be Stamp Duty Land Tax (SDLT) payable.

One option is for landlords to keep their existing properties under personal ownership and set up a company for future buy-to-let purchases.

Long term plans

If you are considering incorporating your property business, it is important to look at the big picture, especially in terms of any future exit plans.
What to think about:

  • If a company sells properties, they can potentially be taxed twice – one charge on the gain and another on the extraction of profits.
  • Individuals receive an annual CGT exemption (currently £11,300) but companies only receive indexation allowance.
  • If the company is liquidated or sold the lower 10% / 20% CGT rates will apply to any gain on the shares, compared with the higher 18% / 28% CGT rates if the properties are sold directly.
  • You are unlikely to get CGT Entrepreneurs’ relief or Inheritance Tax business property relief whether or not your business is incorporated.
  • Some anti-avoidance such as the new company distribution Targeted Anti-Avoidance Rule require distributions upon winding up a company to be treated as income instead of capital. Read more about this

The practicalities of running a limited company

Tax aside, there are other more practical aspects of incorporating your property business. For example, you will need to find out whether your mortgage lender will need to approve any transfer of property ownership into a company and if they will lend to the company at the same interest rate.

Also bear in mind that there is more administration involved with running a limited company, such as deciding how to pay yourself (salary / dividend), preparing and filing accounts, corporation tax returns, confirmation statements and dealing with VAT (if applicable).
That being said, having a decent accounting app and the right advice and support can take away a lot of the pain. Find out how Boox can help

In summary, there is much to think about before you decide to incorporate your buy-to-let business and it very much depends on your personal circumstances and plans.
If you are yet to make up your mind, we have produced a free guide to setting up and running a limited company, which has everything you need to know.

Download it by clicking on the link:

limited company guide

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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