Private landlords – Operating a buy-to-let business through a company

31st July 2017 | Posted in: Business Tax, Pensions, Savings & Investments, Personal Tax, Planning, Properties, Property Investment, Regulations property business

Following the Government’s decision to restrict tax relief on finance costs for private landlords, we are often asked by clients if they should operate their business through a limited company.

In a simple scenario a taxpayer will have no buy-to-let properties and is starting out on a new business venture.  In this case they can set up a new company, which can obtain funding to purchase one or more properties for letting.

The finance costs in the company are currently available for corporation tax relief without restriction, albeit the borrowing rates in a company are likely to be higher than those available to a private landlord.  However the number of buy-to-let products available to limited companies has doubled in the last year as lenders try to accommodate private landlords transferring their properties into limited companies.

A further benefit of using a company is that the rate of corporation tax is currently 19%, and is planned to drop to 17% by 2020/21.  This is certainly favourable compared to the current 45% top rate of income tax.

Lower rates of corporation tax should in theory mean there is additional funding available that could be earmarked for further property investments.

However things often do not tend to be this straightforward.  For example most of our clients in this position already own buy-to-let properties in their own name (or perhaps jointly with their spouse or civil partner).  What if they want to transfer these properties into a company?

Firstly the transfer of the properties is a chargeable event for capital gains tax.  The capital gain is broadly the market value at the date of transfer less any allowable costs.  In the case of a larger property business it may be possible to claim what is known as ‘incorporation relief’.  This may apply if an entire property business is transferred from personal ownership into corporate ownership.  However a passive investment, with only minimal involvement from a taxpayer is unlikely to satisfy the ‘business’ test.

In the recent tax case of Ramsay v HMRC [2013] the taxpayer, Mrs Ramsay, spent 20 hours per week carrying out various activities in relation to her rental properties including checking and paying electricity bills, meeting with tenants, carrying out routine maintenance, gardening and landscaping, ensuring compliance with fire regulations, cleaning communal areas and removing rubbish.  Mrs Ramsay was successful in claiming incorporation relief based on the significant amount of time spent managing the properties.  This therefore gives a useful benchmark figure of 20 active hours per week, which should be enough to justify a claim for incorporation relief.

Even if a taxpayer is eligible for incorporation relief he or she also needs to consider the possible Land & Buildings Transaction Tax (LBTT) cost for Scottish properties or the equivalent Stamp Duty Land Tax (SDLT) charge for properties situated in the rest of the UK.

The cost of both LBTT and SDLT must be factored into any calculations involving the incorporation of a property business.  Depending on the value of the properties being transferred this could be significant and in many cases prohibitive.  Furthermore in addition to the basic charge, the 3% Additional Dwelling Supplement (ADS) applies to all of the properties transferred to the company.  The ADS may be avoided, however, if a minimum of 6 properties are transferred as the entire transaction is then taxed at the commercial rather than residential LBTT/SDLT rates.

Finally a word of warning to any landlords rushing to incorporate their business to avoid the restriction in mortgage interest relief.  There is always a possibility that the Government will take a dim view on anyone doing this and introduce changes to corporation tax to compensate for the lost income tax revenues.  Therefore anyone thinking of incorporating should proceed with their eyes wide open.

The overriding message here is that obtaining tax advice is absolutely essential for anyone considering incorporating their buy-to-let property business.  Please contact us for assistance.

If you feel we could help you and would like to discuss any of the above, please contact Kenny McNeill CTA on 0131 317 7377 or email to kenny.mcneill@jsca.co.uk.
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