Why You Should Consider Transferring Your Property To A Limited Company

A transfer of a property to a limited company could offer some significant income and inheritance tax savings but each case needs to be looked at on its own merits and with careful consideration of the costs involved.

In the literally hundreds of cases I have dealt with over the last 3 years the main driver for a landlord considering moving a property into a limited company can be narrowed down to four main reasons:

• To save SDLT
• To avoid section 24 interest relief restrictions
• To avoid higher rate income tax
• To eliminate inheritance tax

How would transferring a property to a limited company save SDLT

This is perhaps best explained by way of a real-life example. Miss Fotiades approached me to assess her SDLT position. She owned a flat which was valued at £322,000 which was her main residence. She was an additional rate taxpayer (45%) and was looking at buying a new main residence for £900,000. She wanted to keep a hold of the flat and let it out as part of a long-term investment plan and wanted advice on whether she should retain ownership in her personal name or transfer the flat to a limited company. She believed she would also be able to save some SDLT.

Since March 2016, a 3% SDLT surcharge has been applied to the purchase of an additional residential property. If Miss Fotiades were to simply purchase her new main residence and retain personal ownership of the flat, her SDLT on £900,000 would be a whopping £59,000. 

By transferring the flat to her limited company at the same time, or within 3 years of moving out, the limited company would pay SDLT of £13,260 but she could then avoid the 3% surcharge on £900,000 which is £27,000. A saving therefore of £13,740. 

Avoid s24 interest relief restrictions and higher rate income tax

In his budget on 8th July 2015, the then chancellor George Osbourne, announced a measure to restrict the tax relief on finance costs (including mortgage interest and bank charges) to 20%, for individuals. Incorporated into Section 24 of the Finance (no. 2) Act 2015, the measure has had a major impact on landlords and new investors alike.

The restriction does not apply to limited companies. This has subsequently become a major factor for many landlords, particularly higher-rate taxpayers, to consider purchasing or transferring property through a limited company. 

Many landlords however are unaware that interest rates for a mortgage in a limited company are currently slightly more expensive than for the same mortgage in personal ownership. Typically, the difference is around 0.8 to 1%. So, for example, interest on a 5-year fixed rate for purchase in an individual’s name may be quoted at 4.9%, whereas the same lending to a limited company would be 5.7%. 

For a lower rate taxpayer, this could make them worse off if buying through a limited company. For a higher-rate taxpayer, even with a higher interest rate, the tax savings are such that they are still significantly better off purchasing through a limited company. 

As an example, John Denvar is a higher-rate taxpayer. He wishes to purchase a BTL and is considering whether to purchase this in his personal name or through a limited company.  The property he is purchasing is £150,000 and he wishes to take a 70% LTV. The rental income is £850 per month. He has been quoted a rate of 4.9% if purchasing in his personal name compared with 5.7% if the purchase is through a limited company. This is what his net cash retained position looks like under both options:

Despite a higher rate of interest, John is better off with ownership in a limited company by £1,095 per annum in terms of net cash retained. The corporation tax rate of 19% more than compensates for the higher interest rate compared with the loss of tax relief and 40% tax in his personal name.

Eliminate Inheritance Tax

A limited company, if set up correctly, can provide an effective way to eliminate inheritance tax and ensure your property wealth can be passed down to future generations and provide protection for your bloodline.

This is an important and serious consideration for many landlords, especially with the increase in property values and the fact that the inheritance tax net is now catching far more people than ever before. 

A complete subject in its own right please see the following resource on inheritance tax on houses for a comparison of the inheritance tax position of owning property in your personal name compared with a limited company.

If you need more information on this subject then get in touch at 0800 907 8633, via enquiries@uklandlordtax.co.uk or via our online contact form to speak to one of our specialist tax advisors.

If you found this article informative then why not read our guide to HMRC’s let property campaign or our news around the making tax digital delay next?

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG