Landlords with buy-to-lets in personal ownership may be able to transfer their property into a new limited company. However, this process involves specific costs and requirements that may impact financial goals and property strategy. If your question is “Is it beneficial to transfer my property to a limited company?”, the answer is – it varies from situation to situation.
For a clearer understanding of potential savings for your specific scenario, consider using a personal to company transfer calculator that can provide tailored insights into the potential tax implications and cost efficiencies of moving your property into a limited company.
Making the decision to transfer a personally owned property into a limited company involves understanding how it can affect taxes, financing, and future growth options.
Most of the time, investing through a limited company is more tax-efficient than investing in your own name. Here’s why.
Corporation Tax vs. Income Tax
When you invest through a company, you pay Corporation Tax of 19% on all profits up to £50,000. But if you invest in your own name, you could be paying Income Tax of up to 45%.
Mortgage interest deductions
With a limited company, you can deduct 100% of your mortgage interest payments from your rental income, meaning you only pay Corporation Tax on your profits.
Extracting profits
There’s often the perception that, with a limited company, you’re doomed to pay tax twice: on your rental income during the ownership period, and then again when you extract the funds from the company. But that’s not the case.
In fact, there are three ways to extract your profits tax-efficiently:
Owner/Director Loan repayments
When you invest through a company, you technically lend that company the money for that investment. That means it can pay you back. And repayments on loans don’t count as income – so they’re tax-free.
Of course, you can’t take an Owner Loan Agreement if you invest in your own name.
Dividends
UK taxpayers get a £500 tax-free allowance on dividends – per shareholder, per year. It’s worth noting that this applies to your total dividend income, across all your companies. So, if you had four limited companies, you’d still only be able to take £500 out tax-free as dividends – not £4,000.
Pension contributions
You can make pension contributions from your limited company directly to your pension provider. These pension contributions are considered as a tax-deductible expense, similar to mortgage interest payments. You should always discuss with an IFA and the pension provider before making any payments. This then results in lower reported profits when it comes to paying corporation tax.
What are the costs to keep in mind?
When transferring property into a limited company, capital gains tax may be due on any increase in the property’s value since it was originally acquired. This transaction is generally treated as a sale, meaning CGT can apply to the transfer, which may impact the feasibility of the move. However, some landlords qualify for CGT reliefs, particularly if the property is part of a rental business.
Transferring property to a limited company typically incurs stamp duty, including the now 5% surcharge applied to additional properties in the UK. The SDLT liability can be a significant expense, depending on the property’s value, and should be factored into any analysis of the long-term tax benefits.
Calculate your costs: Using a personal to company transfer calculator can help estimate CGT, SDLT and other potential costs, providing a clearer picture of whether the transfer may lead to savings.
To decide if a limited company structure is beneficial, landlords may find it helpful to estimate the long-term tax savings alongside immediate costs. A personal to company transfer calculator can be a useful tool to input your buy-to-let details, estimate mortgage interest deductions, rental income impact, and other factors, giving you a clearer view of your potential savings over time.
Transferring personally owned property to a limited company is a significant decision that depends on individual financial goals, the size of your property portfolio, and future plans for growth. While it’s not necessarily suited to every landlord, it can offer an effective way to reduce tax liabilities and improve investment flexibility for those focused on long-term returns.