Landlords using companies to buy a property What are the pros and cons?
Date Published 06 December 2022
Summary
Landlords are facing increased financial challenges as a result of the restriction in loan interest relief and increased cost of borrowing. Understanding the tax efficiency of holding property in a company could well reduce a landlord's tax cost and therefore increase financial returns. But what are the practical steps involved?
In this session we were joined by Mark Stemp, Tax Partner at Crowe UK, who has over 20 years of experience advising clients and their agents as a property tax specialist.
Why is understanding the advantages and disadvantages important at the moment?
Landlords are facing increases in tax liabilities currently. It's important to understand the pros and cons so that you can structure your business in the way that's most tax efficient and reduce these pressures as much as possible.
What tax pressures are landlords facing?
● Loan interest restriction
● 3% surcharge on Stamp Duty Land Tax (SDLT) for owning more than one residential property.
This has resulted in an increase in income tax.
Other pressures landlords are facing include:
● Loan interest rates increased.
● Additional legislation, for example with EPCs and potential costs incurred to bring properties up to the required energy efficiency standard.
● The potential for more rent controls, as seen in Scotland.
These things all affect financial returns and, in some cases, require action from landlords to try to protect their business.
What are we seeing landlords do?
1. Increasing rents
2. Selling properties to reduce debt
3. Increasing tax efficiency
4. Considering different ownership structures
Ownership structures
There are many different ownership structures that can be used when owning residential property. These include owning property individually, jointly as a partnership, or through a trust. There is also the option for partners and trusts to own property via a company, and we will look at the potential benefits to this.
You'll need to consider:
1. Personal tax rates when owning property individually, jointly or in partnership.
2. Company tax rates plus profit extraction taxes when owning property through a company.
3. Whether this is a new acquisition or existing property ownership and the implications of changing personal ownership to company ownership later on. (Thinking medium to long term).
Personal ownership
Taxes you may be liable to pay when owning property personally include:
● Income Tax, which depends on your overall earnings and could be 20%/40%/45% or more. The loan interest relief restriction may mean tax rates are higher.
● Capital Gains Tax (CGT), which is 28% tax on the growth in the property value while you owned it.
● Inheritance Tax. The standard rate is 40%.
● SDLT calculated at the normal rate +3% when owning more than one property. There's also an additional 2% to pay for non-UK residents.
Company ownership
When owning property through a company, these are the taxes you may be liable for:
● Corporation Tax. This is payable on any rental profits at 19%, increasing to 25% for some in April 2023. Companies are eligible for relief for loan interest, so this can be benefited from.
● Corporation Tax on capital gains, rates as above.
● Income Tax on extraction from the company, if applicable. You will pay personal income tax on the dividend dependent on your rate of tax.
Things to note with company ownership:
● Annual Tax on Enveloped Dwellings (ATED). There may be an exemption from tax charge, however an annual tax return is still required.
● SDLT when acquiring property. The same rates apply when buying as an individual, including the 3% surcharge.
● Inheritance Tax at 40%.
How do you determine the best ownership structure for your properties?
Firstly, do a cost benefit analysis.
This will include determining your personal income tax rate and comparing this alongside the tax you'd be liable to pay as a company, and seeing how the two compare.
You may find that owning personally can be better if extracting all profits, and owning as a company may be better if repaying corporate debt or restricting profit extraction from the company.
Key considerations when owning property through a company
● How much is the potential tax benefit of owning as a company vs the extra costs?
● Will you be taking a dividend?
● Paying down capital repayments quicker. Retained profits and repayments of capital are charged to Corporation Tax not Income Tax.
● The compliance efforts and complexity is greater when owning through a company.
● There are some additional costs incurred for accounting and tax returns.
What about if I already own property and want to transfer it to a company? Is it worth it?
This can be costly and complicated, but it is possible. You will be liable for CGT and SDLT. You will need to weigh up whether those costs are outweighed by the benefits of the property being owned by a company going forward. Take advice on the reliefs available.
When deciding that company ownership is best, who should own the shares?
You could consider:
● Involving the wider family
● Children & grandchildren
● Creating a Family Trust which allows you to retain control and protect the asset.
When using a Trust structure, it allows dividends to be taken later on by children (when they are no longer minors) or grandchildren when they are in need of cash for things like house deposits or other expenses.
This is where you can benefit from the beneficiary's income tax rate being lower, for example if they're a student, or earning a lower amount as the tax rate for the dividend will be calculated based on this.
Your questions answered
Q: Can you gift a mortgage-free property to a company without tax liability?
A: There is CGT to consider from your side. When the company receives the property, there will be a liability for SDLT. If you were gifting to an individual, there wouldn't be SDLT to pay.
Q: What costs does a landlord face moving a property into a company? Is it cheaper to buy a new property as a company?
A: You need to consider CGT and SDLT. There are some tax reliefs, but they're not available to everyone. You tend to find new properties are easier to acquire in a company rather than transferring an existing one, as there is only SDLT to think about in that case.
Q: If I wanted to buy a property from myself via my company, what are the rules on gifting a property or selling at a very low price?
A: The tax office will look at the market value of the property, so you will need a valuation to get the right figure and then this will determine the tax liability. You should use market value when considering this.
Q: My dad wants to transfer a property into mine and my brothers' company, is this possible or is it better to make him a shareholder?
A: If he wants to transfer his property to your company, this is a normal conveyance and he will need to pay CGT, the company will need to pay SDLT. If you choose to make your father a shareholder, you need to think about Inheritance Tax planning. I probably wouldn't advise making him a shareholder. If the reason for considering this is Inheritance Tax, look at loans out of your company to him which he can do planning with.
Q: I own property myself and own other property through my company. I did not set up a trust, am I able to create one now or later?
A: Most of the time, yes. There are quite a lot of tax benefits to trusts in terms of Inheritance Tax. As an individual you put value into a trust up to £325,000, and as a married couple it's
£650,000. You could transfer some of your shares, as long as that is below £325,000 (or
£650,000 as a married couple) then there's probably no tax to pay on setting up that trust.
Q: I understand that Capital Gains Tax is payable later if you have transferred the property into a company at the outset, but it was not payable at the time. How is that Capital Gains Tax then paid and at what rate?
A: In short, you could, if you meet the criteria defer the CGT from the incorporation relief. Where the CGT comes back into play is where there is a change to the shares in future. At this stage the CGT becomes payable. Of course, this change may never be made and could be deferred for a very long time or not at all in the event that you die before making that change. When the company sells the property in future, the corporation tax is only due on the base cost uplift, so this can be a benefit.
Q: I own a property through my limited company. Can I offset the corporation tax by contributing the rental income to my pension?
A: It's possible to extract your money in different ways. We have talked about dividends, but instead you could make pension contributions. This does have some restrictions, but it's worth looking into it to possibly reduce your corporation tax liability if you're actively involved in the business.
Q: Do you think tax liabilities will be lowered over the next ten years?
A: The current view when looking at the government is that tax rates are on the increase. We've just seen corporation tax increased from 19% to 25% (as of April 23), and a reversal on the proposed cut on income tax. I'd expect tax to stay the same or increase slightly. There is still quite a disparity between owning property as an individual and owning through a company, especially with the loan interest relief restriction, so what we're looking at here is certainly relevant.
Note: The speaker has provided general tax advice on the topic. Our webinars are not intended to provide or substitute for professional advice with respect to any particular topic. The information imparted through our webinars is provided for reference purposes only and is not intended, nor should it be used, as a substitute for professional advice or judgment or to provide accounting or legal advice with respect to particular circumstances. It is important that you take tax advice specific to your own circumstances.
