Is It Worth Setting Up A Company To Save Tax On Buy To Let?

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Setting up a company to purchase buy-to-let property does have its advantages but there are also some pitfalls to be aware of that can result in big tax bills.

One of them is the risk of having to pay tax twice in some cases if you try to reduce your tax bill by moving your investment into a limited company.

This may come as a surprise to some landlords who may have hoped to sidestep some of the increased tax liability that has been hitting buy to let investors recently and shows just how important getting the right tax advice can be.

If you’re a landlord considering putting your buy to let properties in a company then it is important to make sure that you work within the current rules and calculate if going down the company route is worthwhile.

There are cases where landlords have been taxed twice on their rental income via their company and personally including the extraction of any money withdrawn from the company.

This could make transferring your investment property to a company cost more than its worth.

So what’s the difference in taxation between owning an investment property personally and owning one or several properties as a company?

Owning an investment property personally

Mr Evans works as a manager at a medium sized company and has decided to buy an investment property to boost his income and pension when he retires. His overall income puts him in the higher rate tax bracket.

His profits from the buy to let property are therefore taxed at 40%. Any capital gains he makes from the property will be taxed at 18%.

So for example if he was to buy a property at £200,000 and eventually sell it for £250,000, his gain would be £50,000.

He can currently deduct expenses such as stamp duty, legal fees on the purchase and sale as well as estate agents’ fees from his £50,000 which could add up to £7,000.

If his personal tax allowance of £11,100 is also deducted this would leave a taxable amount of £31,500.

While Mr Evans will be paying tax on his rental income, the return from investing in property is still worthwhile and helps generate a passive income which he can build upon as he acquires additional buy to let properties and expands his portfolio.

Owning property through a company

Mrs Lawrence owns an investment property through a company she set up for the purpose.

Her rental profit from the property is taxed at the corporation tax rate of 20% saving 20% on the tax she would be liable to pay on a personal investment.

Rather than take an income on the property, she invests the profits in buying additional properties. When she comes to sell a property, capital gains will be charged at the 20% corporation tax rate, which is a little more than the 18% Mr Evans will pay.

Owning a property through a business does give Mrs Lawrence some tax advantages but she will not be able to see the immediate benefit in personal income. This will be the case further down the line when the investment properties are sold or the business is goes through a liquidation process.

Transferring an investment property to a company

Mr Jones decides to transfer his investment property from personal ownership to his company. The transfer is considered as a disposal for capital gains purposes and he receives a tax bill. There is also stamp duty payable as the property he invests in is worth more than £125,000

Of course your tax liability in each situation can vary and in some cases an investment property can be seen as a “business” rather than an “investment”.

Transferring a property from personal ownership to that of a company is complex and can lead to paying tax unnecessarily.

So just to reiterate, it is well worth seeking advice for your own individual circumstances. This will allow you time to do the maths and decide if owning property through a company is right for you.

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