If you own buy to let properties, chances are you've heard that it might be beneficial to transfer them to a limited company.
When is this appropriate?
One of the main reasons why ownership of buy to let properties is more tax efficient via a company these days is due to the introduction of the mortgage interest relief restriction by HMRC.
This means that you no longer receive a full deduction for the interest paid on any mortgage against your tax relief. It is mid way through being phased in and is scheduled to completed be in force by 2020/21.
In essence, if you own properties in your own name which are mortgaged and you are a higher rate taxpayer, you will pay more tax on your rental profits.
If you are considering buying property and deciding on which vehicle to use for the purchase then read my earlier article at the link below:
Should I buy property through a company?
For existing properties, there are many factors to consider which an article like this cannot fully do justice however the main things to think about are discussed below.
The default position is that any transfer of properties from one person or entity to another gives rise to:
- Stamp duty land tax (plus 3% surcharge)
- Capital gains tax due on the difference between the current market value and what you paid for it
Even if there is no money changing hands i.e you want to transfer the properties to a company you control, the tax rules require that the transaction is undertaken at market value. This is because you are treated as connected to any company that you control for tax purposes.
That being the case, any transfer done at market value for properties held for some time is likely to give rise to capital gains tax and of course stamp duty.
Capital gains tax rates for residential property go up to 28% for higher rate taxpayers which can be a sizeable amount to have to stomach when you are not actually receiving any cash from a third party.
So can anything be done to transfer the properties tax efficiently?
As always with tax, it depends on your circumstances and also of course an informed tax adviser :-)
There is a way of transferring properties to a limited company WITHOUT paying capital gains tax AND stamp duty.
The way of achieving the above is to utilise available tax reliefs that apply to trading businesses. Problem is, renting property has always been seen by HMRC as investment activity rather than trading activity.
How can renting property be seen as a trading business then?
The definition of a business is quite broad - the term has been used in the tax legislation to constitute trading activity however when the definition is discussed in court, the general meaning of the word has relevance.
As such, in front of a judge, the activity of actively managing a portfolio of properties by perhaps conducting viewings, dealing with tenancy agreements, managing repairs and maintenance issues, employing staff to assist in managing the portfolio etc all help to determine whether a business is being run.
Clearly there is more likelihood of you being seen as running a business where you have multiple properties rather than just one or two passive buy to let investments. There is no exact number beyond which you would be deemed to be running a business - instead it depends on the substance and the active role you play in managing your portfolio.
It boils down to a question of fact whether you are deemed to be running a rental property business as opposed to passively holding property for an investment return.
So what is the advantage?
Well recently we helped a property owning family to transfer their portfolio that they had built up over two decades to a limited company saving them over £4.5 million in capital gains tax and stamp duty and £80,000 in income tax on an annual basis.
For the stamp duty saving to work, the rental business must be currently run in a partnership (as opposed to sole ownership).
But clearly, there are substantial savings to be had both initially and on an ongoing basis.
If you think this could apply to you then it is worth seeking advice to review your state of affairs and consider whether it would be a viable solution for you to implement.
I offer Strategic Consultations to landlords for a tax review of their affairs including whether or not the above would work so if this is of interest feel free to get in touch.
Hope that was useful.