Residential Buy to Let – Should you transfer it to a Limited Company?

If you are reading this as a residential landlord you’ll be acutely aware that HMRC is reducing tax relief on interest you pay on loans used to buy properties to let.

Transferring a let property to a company is one way to avoid the reduction of tax relief as the interest restriction is not applicable to limited companies.

From 6th April 2017 interest relief for individuals and partnerships has only been partly deductible, and from 6 April 2020 not at all. Only partial relief of 20% basic rate tax will be allowed as a credit against the tax payable on the rental profits.

Company ownership

The interest restriction can be completely avoided if the property is held through a limited company. Additionally, the current tax rate for companies is 19% (reducing to 17% from April 2020). As a shareholder of a company the first £2,000 of dividends are also tax free. These benefits prompt the question as to whether it is beneficial to transfer an existing property portfolio into a company structure. The downsides of this are broadly outlined below;

  • When transferring the portfolio to a limited company there will be a charge to stamp duty land tax (SDLT) – in addition to the SDLT paid when the property was first purchased
  • If the value of the property has increased since purchase, there may be a capital gains tax bill to pay (18%/28%)
  • Legal costs will be incurred on the transfer (in addition to when it was purchased)
  • Additional income tax will be payable if profits in excess of £2,000 per shareholder are drawn down

Purchasing a buy to let property via a company from the outset means most of the above disadvantages don’t apply.

Another way?

If your spouse or civil partner pays tax at a lower rate than you, an alternative way to minimise or avoid the interest relief restriction can be considered. If you pay tax at 40% and your spouse or partner pays at 20%, it may be worth considering transferring all or part ownership of the property to them. Advantages include;

  • Unlike the transfer to a company, there’s no CGT to pay where the transfer is to a spouse or civil partner.
  • If the transfer is made as a gift, SDLT etc. will only be payable if your spouse etc. doesn’t take on a corresponding share of the mortgage
  • You can transfer 50% of the income for tax purposes, and so gain the tax advantages mentioned above, by transferring far less, say, 5% of the property to your spouse etc.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

Please contact us for more information:

T: 020 3866 8951

Follow AJN Accountants on Twitter for regular updates.