I have heard a lot of talk recently about the benefits of transferring Buy to Let properties to a company. While there are certain tax advantages there are other factors which may make such an option less attractive.
New rules come into effect next month which will restrict the amount of mortgage interest that can be deducted when calculating profits from rented properties for tax purposes. In addition companies also pay Corporation Tax of 20%, reducing to 17% by 2020, as opposed to personal taxation levels of 20%, 40% or 45%, depending on personal circumstances.
Clearly there are tax advantages to transferring to a company but there are disadvantages too, starting with Capital Gains Tax (CGT).
When a property is transferred to a company its value will be assessed as its market value at that date. So if a property was purchased some years ago for £150,000 and is now worth £200,000, there will be a significant CGT liability. This assumes that the property has never been the owner’s prime residence.
Any transfers are also liable to Stamp Duty and there are the associated costs of setting up a new company, including new bank accounts and arranging accounting procedures and tax payments.
Once the company is established, transferring new BTL properties becomes more attractive in the long term.
A final consideration is how the rental income is used for personal purposes. If a salary is taken from the company then normal Income Tax at 20%, 40% or 45% will be applied and the company will also be liable for National Insurance payments of 13.8%.
All in all it is not quite as straightforward as some people would have you believe. My advice? Speak to a taxation expert about your specific requirements and situation before rushing into setting up a company.
If you are a landlord considering letting a property or a tenant looking for a new home why not give me, Eddie Carter, a call on 01684 292154 to discuss your requirements. Alternatively take a look around our website. We specialise in the Worcestershire, Gloucestershire and Herefordshire areas.