Since new laws were introduced on 1 April 2017, landlords can no longer deduct all their finance costs from their property income. The new rules are being phased in between now and 2020 - but they don't apply to limited companies.
So, should you transfer your property into a limited company to continue claiming tax relief on all the interest and finance costs?
At first glance that seems sensible, especially as any net profit will be taxed at the lower company tax rates of 20%.
But if you do this, you may also find yourself landed with unnecessary tax bills and costs.
Key things to consider
If you transfer the property from yourself to the company (effectively the company buys the property):
- The company could become liable to pay Stamp Duty land tax.
- You'll have to pay up to 28% capital gains tax on the difference between your original purchase price and your sale price (to the company), subject to any tax reliefs and allowances.
These two main tax drawbacks could potentially wipe out any short-term mortgage interest relief savings. You also need to bear in mind:
- The mortgage. Because you're transferring the property from yourself to a company, the company will probably need a commercial mortgage, which is likely to charge a higher interest rate than your current mortgage.
- The ownership. Once the property is in a limited company, it is owned by the company. If something happens to the company, all its assets will be exposed including the property.
- The future. When you eventually sell the property, the money from the sale will go into the company. The company will pay Corporation Tax on the profits and the balance of the money from the sale will remain in the company. In order to access the funds you'd need to take them out of the company - either as salary, dividends or other means. You'd then pay additional tax on that income.
But there are some situations where transferring to a limited company could make sense:
- If you're buying a new property - a limited company could be a good idea.
- If you currently run your buy-to-let through a properly arranged partnership business, then transferring into a limited company might reduce some of the tax burdens.
- If you want to leave your buy-to-let properties to your children then you could consider the pros and cons of a Family Investment Company as an alternative to a trust.
In conclusion, I'd say as a general rule of thumb, if there are only one or two existing properties in your name, transfering to a limited company doesn't make sense.
But if you‘ve got six or more properties, it might be worth your while looking at how you can enjoy the benefits of a limited company without triggering unnecssary taxes and costs.