How to transfer property to a limited company

Categories: limited company | guides | buy to let mortgage guides | property investment guides

In the Summer Budget of 2015 George Osbourne, the then Chancellor of the Exchequer, announced changes to mortgage interest tax relief, which would come to be introduced into law in April 2017, under Section 24 legislation.

The changes resulted in tax relief on mortgage interest being withdrawn. As a result, landlords now pay tax on all the rent they receive and then claim back a tax credit of 20% on mortgage interest costs.

Where property was invested in via a limited company, mortgage interest remained fully tax deductible. For this reason, many landlords started looking at incorporation.

There are pros and cons with incorporation though, including but not limited to tax. So, it is not the right action for everyone to take.

If you are considering putting property into a limited company, or buying property via a limited company you should consider, amongst other things, the following:

  • Your tax position (and cost of professional tax advice)
  • Your legal position (and cost of professional legal advice)
  • Your mortgage costs (limited company mortgage rates are typically higher than standard buy to let)
  • The ongoing management and administration of the company

NB: This article is for information only, if you are unsure of your tax or legal position seek professional advice. Commercial Trust can identify a mortgage tailored to your needs, but cannot advise on tax or the law.

Contents

A reminder of what a limited company is

A limited company is a private company of any size. A limited company is legally separate from whomever runs it.

The owners of a company are referred to as its ‘shareholder’s. These can be individuals, companies and other bodies. The people who manage a company are referred to as its ‘directors’. One person could be a shareholder and a director at the same time.

The finances of the company are not linked to the owner’s personal finances.

Usually, when it comes to limited companies set up to invest in property, the company is limited by shares (companies can be limited by guarantee, but these are normally ‘not for profit’ organisations; companies can also be unlimited, where there is no limit to liability).

Where a company is limited by shares, the liability for its shareholders is limited to their stake in the company. This means that if the company were to make losses, the company owner’s losses are ‘limited’ to the sum they have invested in it.

However, when investing in property via a limited company buy to let mortgage, lenders will always ask for personal guarantees for a mortgage. Where this is the case, the shareholder(s) who gave the guarantee are personally liable for the debt, if the mortgage cannot be repaid by the company.

Why should you consider moving to a limited company?

A key motivation for investing in property is using it to generate an income. That may be through monthly profits, or it could be through any increase in the value of the property over time (often referred to as capital appreciation), or both.

This is commonly to achieve a better quality of life, or to provide financially for others (e.g. family) now, or as a legacy after death.

As a result, those who invest in property want the money they have put into it, to work as hard as possible for them. This means earning as much from their property as possible.

Where any factor negatively affects the income being generated from a property, an investor will usually want to see if any change can be made to reduce or remove that negative factor.

When the Section 24 changes to tax relief became public, mortgage-holding landlord investors started to investigate ways of maintaining profits.

One avenue of potential opportunity, was whether moving property into a limited company would be of benefit. This became a consideration because mortgage interest is tax deductible for limited companies. In addition, there are other tax breaks that come with incorporation.

But, there are both pros and cons to incorporation, so it is not a simple decision to make.

In what situations should transferring to a limited company be considered?

Higher and additional rate income tax payers pay a higher rate of tax on personal income, so with the removal of mortgage interest tax relief, it is possible that investigating incorporation could be a more pressing matter.

Landlords with multiple properties might also find that limited company investing is advantageous, when it comes to tax.

The rates of personal income tax make clear why, on the face of it, corporation tax might result in a smaller tax bill:

Owning property in personal name

Owning property via a limited company

Rental profit + your other income (e.g. from a job):

Personal income tax charged

Rental profit:

Corporation tax charged

Personal income tax rates:

Personal allowance up to £12,570 = 0%

Basic rate £12,571 – £50,270 = 20%

Higher rate £50,271 - £125,140 = 40%

Additional rate £125,141 or over = 45%

Corporation tax rate:

19% for profits under £50,000 (for profits of £50,000 or over, or unit trusts and open-ended, investment companies see the UK government website)

This is not the only consideration though, which is covered in more detail below.

Pros and cons of transferring buy to let properties to a limited company

Tax and the law are involved in the pros and cons of incorporation, which could not be two more complex subjects. This is why seeking professional tax and legal advice is the only way to be absolutely clear on your personal circumstances.

However, summarised below are some of the pros and cons (from the point of view of a UK registered company), which you might help you ask useful questions to a qualified professional:

Pros

  1. With a limited company, allowable expenses and mortgage interest can be added together and deducted from your rental income to achieve the amount of profit. So, you are taxed on a smaller amount than if you held your property in personal names (where mortgage interest tax relief has been removed to be replaced with a flat 20% tax credit).
  2. Corporation tax is lower than personal income tax. The rate for corporation tax (for limited companies) is 19% for profits under £50,000 (this differs for profits of £50,000 or more, see the UK government website). There is a personal allowance of up to £12,570, where there is a 0% tax rate. Rates for personal income tax are 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers.
  3. There may be positive inheritance tax outcomes if you incorporate, check with a tax advisor.
  4. Your legal liability may be minimised as it is restricted to the company, check with a legal professional.
  5. Getting insurance on a portfolio may be cheaper through a company, an insurance broker may be able to help establish this.

Cons

  1. There are varying costs associated with setting up a limited company, e.g. for professional legal and tax advice.
  2. There may be ongoing costs associated with maintaining a limited company e.g. accountancy services
  3. Some buy to let lenders do not lend to limited companies.
  4. If you transfer property you own in personal name to limited company, the company pays stamp duty as it is categorised as a property purchase by the company.
  5. You may be liable for Capital Gains Tax as the sale of the property to the company is a disposal, check with a tax advisor.
  6. Limited company buy to let mortgage interest rates tend to be higher than buy to let in personal name.

The costs associated with the process

When you transfer property from personal name into a limited company there will be costs to do so, these may include:

  • Any tax or legal advice you take on setting up a limited company.
  • The cost of registering a limited company with Companies House.
  • Capital Gains Tax incurred if you make a profit when you sell the property(ies).
  • Stamp Duty Land Tax (England and Northern Ireland), Land and Building Transaction Tax (Scotland), Land Transaction Tax (Wales) is paid by the limited company when it buys the property(ies).
  • Higher mortgage interest costs are typically paid by a limited company than area paid in personal name mortgages.

To discuss applying for a limited company buy to let mortgage, complete our enquiry form, live chat with us or call us on the number at the top of this page (we cannot help with tax advice).

Alternatives to consider

If you are considering transferring property into a limited company in a bid to reduce costs, but you establish this isn’t going to achieve a saving for you, then you could investigate the following:

  • Review your existing monthly mortgage costs, if you are on your lenders reversion or standard variable rate, investigate if remortgaging could reduce monthly costs. A broker can help with this.
  • Review other costs associated with your property, e.g. is your insurance policy the most cost effective option available? Is your letting agent competitive on their fee?
  • Could you transfer property ownership to a spouse or partner who is subject to a lower tax threshold and so personal income tax would be lower?

FAQs

Yes, you can move your property into a limited company structure, but, be aware that the legal ownership changes and as a result you are technically selling the property to the limited company. This means the limited company purchase will be subject to Stamp Duty Land Tax, in England and Northern Ireland.

If you are a Scottish landlord, you need to be clear on Scotland’s Land and Buildings Transaction Tax (LBTT) and Additional Dwelling Supplement (ADS) implications.

If you are a Welsh landlord, you need to be clear on Wales’ Land Transaction Tax.

Making a decision on whether or not to invest in property via a limited company, or transfer property you already own into a limited company, comes down to:

  1. Tax liability
  2. Legal liability

Mortgage costs are a third element that could influence your decision.

There may be tax advantages if you incorporate. A great deal depends on your personal circumstances, for instance whether you pay higher rate personal income tax or not.

Transferring property into a limited company is in effect selling it to the limited company, so you will pay Stamp Duty in England and Northern Ireland or the equivalent taxes in Scotland (Land and Buildings Transaction Tax) and Wales (Land Transaction Tax).

You may have to pay Capital Gains Tax if the property has increased in value since you bought it.

Property investments held in a limited company are ring fenced in terms of their legal liability too. There can be advantages and disadvantages to this.

From the perspective of mortgage interest rates, limited company products are typically higher.

So, there are pros and cons to incorporation. You may find incorporating is not right for you, or that retaining your existing properties in personal name but making future purchases through a limited company is the right solution for you, or you may find complete incorporation of all properties is the right scenario.

It is a complex subject, and professional legal and tax advice may be vital if you are unclear on your particular position.

Transferring property into a company is in essence selling the property to the limited company, even when you as the owner of the property are the owner of the company too.

This is because a sale has occurred when the legal ownership of the property changes, and when you put property into a company the legal owner is the company and is no longer you as an individual.

This means that stamp duty is payable if it applies to the property in question.