Since 6 April 2020, the income tax relief landlords can claim on residential property finance costs has been restricted to the basic rate of income tax. This means higher-rate taxpayers can no longer deduct all their finance costs - such as mortgage interest - from their property income. However, the rules don’t apply to limited companies
Should I transfer my property into a limited company?
At first glance, transferring your property seems sensible, especially as any net profit will be taxed at the lower corporation tax rates of 19% (2021).
But if you do this, you may also find yourself landed with unnecessary tax bills and costs.
If you transfer the property from yourself to a company (effectively the company buys the property):
- the company could be liable to pay stamp duty
- you may have to pay up to 28% capital gains tax (CGT) on the difference between your original purchase price and your sale price
These two tax drawbacks could potentially wipe out any savings from claiming full interest tax relief on your finance costs.
Disadvantages of transferring a property into a limited company
You also need to bear in mind:
- The mortgage. The company that will own the property 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 need to be taken out of the company - either as salary, dividends or by other means. You'd then pay additional tax on that income.
Advantages of transferring a buy-to-let into a limited company
There are some situations where transferring to a limited company could make sense:
- If you're buying a new property, doing this through a limited company could be a good idea.
- If you currently run your buy-to-let through a partnership, then transferring into a limited company might reduce the tax burden.
- If you want to leave your buy-to-let properties to your children, you could consider a Family Investment Company as an alternative to a trust.
As a general rule, if you own one or two buy-to-let properties, transferring to a limited company doesn't make sense.
But if you've got six or more properties, it might be worth looking at how you can enjoy the benefits of a limited company.
Written by Jonathan Amponsah, founder and ceo of The Tax Guys.