Pros and cons of using limited companies for buy to let properties

Following the announcement to cut tax relief for landlords from April 2017, setting up a limited company to purchase investment properties has been suggested as one way to ease the burden of tax.

Whilst the legal transaction is essentially the same whether an individual or a company is purchasing the buy- to- let properties, there are different considerations for tax purposes:

Pros

• Higher tax relief

From 2017 to 2020 the amount of mortgage interest tax relief for individual landlords will be progressively cut from a maximum of 45% to 20% for top rate taxpayers. This change does not currently affect Limited Companies (although the rate of relief for companies is of course limited to the rate of corporation tax, which is currently 19% and is expected to fall to 17% by April 2020).

• No tax is due on dividend withdrawals up to £5,000 – essentially you can receive £5,000 tax- free income from your Company
• Profits retained within the company can be reinvested to secure further properties, with only Stamp Duty Land Tax to pay on the purchase, allowing more cash to be re-invested.
• Full tax relief is available on mortgage interest payments
• Personal funds introduced into the Company can be drawn out of the company by way of Directors Loan.

Cons

• Dividends over £5,000 will be liable to tax. Basic rate tax payers will pay 7.5%, higher rate payers will pay 32.5% and additional rate payers will pay 38.1%
• There is no Capital Gains Tax allowance when selling a property in a Company, although indexation allowance is available when calculating a company gain. Individuals selling a property have a £11,300 Capital Gains annual exemption (2017/18).
• There are numerous additional costs associated with setting up and running a limited company, filing at Companies House etc.
• Higher mortgage rates.

Many lenders will charge higher interest rates and fees for Limited Companies compared to individual buy to let mortgages.

• Reduced choice of lenders and mortgages as many lenders do not offer mortgages to Limited Companies.
• Cost of transferring existing investment properties from an individual name into a Limited Company structure is more complex than purchasing new properties, as Capital Gains tax and Stamp Duty Land Tax will need to be considered.
• Certain landlords with investment properties worth more than £500,000 may also need to consider the added cost of Annual Tax on Enveloped Dwellings.

Each case is very much dependent upon the individual circumstances and we would suggest getting in touch with one of our Team at Whiting & Partners

Disclaimer - All information in this post was correct at time of writing.