Buy-to-let Property - Limited Company vs. Personal Investment?
Property investment and buy-to-let ownership are an attractive proposition for investors. While the property market fluctuates like any other, buildings and residences are a tangible investment that can return significant returns over time.
As with any business, there are multiple ways to manage your investments and assets. ICE Chartered Accountants work with many property investors and professional buy-to-let landlords. Our team regularly consult on the pros and cons of making acquisitions through different trading structures, and have laid out here the primary considerations to bear in mind.
Managing Investments with Professional Advice
With any long-term financial commitment, it is always advisable to consult an accountancy professional to help you understand the most advantageous way to manage your investment.
There are multiple factors to consider when deciding which investment structure will work best for you, and offer the most tax-efficient solution, such as:
Whether to purchase as an individual, alongside a spouse or partner, or through a limited company?
How long you intend to retain the property - are you planning to redevelop and resell, or keep your property as a long-term buy-to-let?
What sort of income can you expect to generate regularly, and how you will leverage this revenue to support your investment portfolio?
The impact on your tax liabilities, and what sort of capital gains costs you need to budget for?
What kind of buy-to-let mortgage products are available, and what fees and interest rates you might expect to pay?
How those fees and costs affect the profitability of your planned investment?
Investing in Buy-to-let Property Through a Limited Company
With further changes to the tax relief available to buy-to-let landlords introduced in the 2020 budget, investing in property through a limited company is becoming more popular. Incorporated businesses are not subject to the same tax relief restrictions.
However, you need to know the pros and cons of investing in property through a limited company and prepare for the filing requirements and administrative obligations associated.
It may be beneficial for you to purchase property through a limited company, or it might be advantageous to continue to trade as an individual. This all depends on your circumstances, which is why it is so essential to seek professional advice before making any decisions. There are also other options, such as creating a Special Purpose Vehicle, which is a type of limited company expressly incorporated to manage ownership of properties. Given the complexity of taxes and how these relate to each set of circumstances, we are unable to make specific recommendations here. However, we hope these guidelines are useful, and we are on hand to provide tailored tax advice to assist you in making the best decisions!
Owning Buy-to-let Property as an Individual
Buying and retaining investment property as an individual has previously been the most straightforward way of managing a portfolio.
However, with the changes to tax relief, this may not now be the most cost-effective option.
As tax relief for landlords has changed over the last four years, there has been a knock-on impact to basic rate taxpayers. This year's budget introduced the final phase of removing the tax relief previously claimable on mortgage interest costs. Restructuring the inclusion of interest fees means that basic rate taxpayers are now being nudged into the higher brackets since they cannot deduct the interest from their income. Mortgage interest is now claimed as a tax credit from the resulting tax liability, rather than reducing the income figure. Property
Ownership as a Joint Owner
One option is joint ownership for investors whose partner or spouse does not have a significant secondary income. Profits can be split between the respective owners, which means that if you do find yourself in a higher rate tax bracket, this will be limited to 50% of your profits.
There is also the potential of reducing the profits declarable by the higher rate taxpayer, and thus reducing your overall tax liability. When considering apportioning property other than as a 50/50 split, it is critical to consult with a tax advisor. HMRC must find your ownership structure acceptable, and so this needs to be verified before you commit to any plans.
Owning Property as an Incorporated Company
If you own property through a limited company, the investor(s) will act as company directors and shareholders. The advantage of this structure is that limited companies may offset their mortgage interest costs directly against their income. Corporation Tax remains at 19% from April 2020, making this a tax-efficient option.
However, your access to funds will be restricted when trading through a limited company, so this option is usually viable provided you don't require immediate access to revenue. With the savings in tax available, investing as a limited company opens up opportunities for further investment in your property portfolio with the reduced tax payable.
Drawing Income from a Buy-to-let Limited Company
The main drawback to trading as a buy-to-let investor through a limited company is that you may find it more complex to access funds. It is wise to consider in advance how the profits will be paid. For example:
You could pay a salary from the company to the directors.
The company could declare dividends at year-end payable to the shareholders.
You could make pension contributions from the business on behalf of the directors.
Which of these options is most advantageous for you depends on multiple factors. If you do not have another significant income stream, paying a salary can be an attractive option. You can claim the personal tax allowance of £12,500 before paying income tax and will be able to claim exemption from National Insurance depending on which threshold your salary falls into.
However, you must remember that when National Insurance becomes payable, you will incur both personal NI deductions as well as employer's NI. The company can claim all salary costs as an expense, which is claimable against profit before tax calculations are carried out.
Dividends are another way of distributing profits and can be combined with other remuneration policies. Dividend Tax is payable by the shareholders on any dividends received over £2,000, and the business will also still need to pay tax against the profits declared before those dividends are paid out. Another option is for the limited company to make pension contributions to the director's pension scheme. These contributions are still claimable as an expense against corporation tax. All of these options are subject to consideration of your personal circumstances, so ICE Chartered Accountants strongly recommends seeking expert advice about how to best structure your income.
Limited Company Mortgage Interest Rates
If you are investing in property as a limited company, you will need to compare the mortgage interest rates available. Most UK lenders will consider individual or joint mortgages, but a commercial mortgage is a more specialist product. The typical interest rates payable on a commercial mortgage are higher than against individual lending, and the lender's fees are also very likely to be higher.
Other costs to consider are legal costs and conveyancing costs. One of the advantages of investing in property through a limited company is that you may find yourself able to access a higher lending value. Mortgage lenders can be more generous in the value of commercial mortgages since the tax relief available makes the buy-to-let business more profitable. To start trading as a limited company, and to secure mortgage lending, the business will need to have been incorporated, have a business bank account, and may be required to offer personal guarantees from the directors depending on the scenario and security available.
Transferring Investment Property to a Limited Company
You can transfer property from personal ownership to a limited company. Indeed, many buy-to-let landlords are considering doing so, to achieve the reductions in tax liability. However, this is not as simple as changing the name of the owner, since the transfer of assets must be made at arm's length. This means that you need to transfer the property through a sale and repurchase transaction, which will incur costs, including:
Capital gains tax
It is also essential to bear in mind the mandatory administration required in running a limited company. For example, you will need to file annual accounts and returns. Even with the costs involved, it may be cost-effective to transfer ownership of your properties to a limited company - remember that all of the expenses such as mortgage broker fees are claimable as costs before tax is calculated.
Even with the costs involved, it may be cost-effective to transfer ownership of your properties to a limited company - remember that all of the expenses such as mortgage broker fees are claimable as costs before tax is calculated.
Property Investment Professional Advice
We hope this guidance is useful and demonstrates the number of options available when considering the best structure for investment business ownership.
Whether you are an experienced buy-to-let landlord or a first-time investor, it is essential to understand all the pros and cons and seek professional financial advice in consideration of your personal financial and taxation circumstances.
For help understanding the most viable investment options, how to structure your salary and dividend payments most efficiently, or for any advice about any of the guidance included in this article, please contact the ICE Chartered Accountants.