Advantages & disadvantages of using a company for buy to let investments

In the summer 2015 budget the chancellor announced plans of a number of direct attacks on private landlords.

1. 3% increase in SDLT better known as stamp duty on buy to lets or second homes.
2. Finance cost restriction
3. Capital gains tax (CGT) to be payable in 30 days.

However this was not the whole picture as the introduction of other changes later or separately shows us the government’s intention and determination to remove what they see as “Accidental Landlords”, these are the individuals who have acquired few properties over the years and their portfolio is not large enough to be classified as a business.

Moving forward HMRC would want to see more “professional Landlords”, these are landlords that use a limited company as a vehicle to run their property portfolio, this would provide a more stringent reporting on the income & Profits from the property business.

In the 2016 budget the chancellor announced a reduction on capital gains tax on most assets, dropping from 18% and 28% to 10% and 20% however residential properties remain at the previous levels.

The introduction of High Income Child Benefit Charge which was another tactic to claw back child benefit from families where any individual has earnings over £50,000.

And then the removal of the 10% wear and tear allowance from tax year 2016/17.

Also taking into account that Basic Rate tax band was reduced from 2010/11 level of £37,400 to 2015/16 level of £31,785 pushing more people into the higher rate and although the basic rate band had increased slowly since 2015/16 it is currently only at £34,500 for the 2018/19 tax year.

At first glance when we consider the points above it appears that running a property company is very attractive especially when we take into account the lower tax on profits and the better relief for interest and losses. However there are draw backs that need to be carefully considered.

The advantages to using a limited company;

• Corporation Tax is currently set at 19% and will be reduced to %17 from 1st April 2020
• Capital gains are also charged at the same 19% and 17% from 1st April 2020
• Companies still get full interest relief (although come restrictions apply to amounts over £2m per year)
• Companies get indexation relief to exempt them from capital gains based on inflation.
• Stamp duty on the purchase of company shares is only 0.5%
• Flexibility in terms of choosing year end date (as an individual property letting business is taxed on financial year basis)
• Company shares could be passed on in small quantities and intervals to take advantage of the donors CGT & IHT exemptions
• Shares could be passed to children without losing control of assets either by keeping the majority of the shares or creating different classes of shares.
• An investor could claim relief for interest costs on funds borrowed to invest in a property company against any other income including their salary or profits from their self-employment or their own personal rental income. Read More Here…
• Companies will not be subject to mandatory digital record keeping and quarterly reporting (under the “Making Tax Digital” proposal) until 1 April 2020.

The disadvantages of using a limited company;

• Companies don’t get a personal allowance currently set at £11,850
• Companies don’t get annual exemption for capital gains currently set at £11,700
• Personal tax consequences arise when trying to extract the profits either from rental business or gains from the limited company
• Stamp Duty exemption for lower company share value applies to considerations not exceeding £1,000 compared to SDLT exemptions for property purchased under £40,000

If you have any questions regarding your current investment portfolio or planning for the future please don't hesitate contact us on ​​[email protected].

Alex Bahamin ACCA MAAT

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​About The Author;

Alex is a qualified chartered certified accountant, member of ACCA and AAT.

He is a property tax advisor, investor and has been helping landlords keep more of their wealth for themselves and their families.

With both technical expertise and personal experience of being a property investor himself, Alex can help other property investors save tax and structure their businesses in the most efficient way.