Is It Tax Efficient To Transfer Rental Property Into a Limited Company?

 

A limited company is a separate legal entity and would become the legal owner of the residential property. This means the company would pay corporation tax at 19% on profit up to £50,000 increasing up to 25% for profit above £250,000. As the individual is now no longer the legal owner of the property, income tax on the rental property profits will no longer be due. For a higher rate earner this is the equivalent saving of profit at 40% tax rate. A property limited company structure can therefore reduce the tax liability of a higher rate taxpayer. 

 

Remember however, as shareholder of the limited company, any profits (after corporation tax) taken out of the company in the form of dividends to use as an income stream will still be liable for income tax. 

 

If you are considering if a limited company is right for you work out your tax liability under both scenarios. Below is a simple example to demonstrate this. 

 

John is a higher rate taxpayer. John owns 2 properties which generate total rental income of £70,000 and incurs finance loan interest cost of £20,000. Consider John’s net income and tax liability as firstly an individual landlord and then as sole shareholder of a buy-to-let property company. 

 

• Rental income £70,000 

• Finance Interest costs £20,000 

• Gross profit £50,000 

• Interest cost 20% tax deductible £4,000 

• Individual Income tax due at 40% £26,400 (£70,000 - £4,000 = £66,000 @ 40%) 

• Gross profit £50,000 less tax £26,400 = £23,600 

 

• Rental income £70,000 

• Finance Interest costs £20,000 

• Taxable gross profit £50,000 

• Corporation tax at 19% £9,500 

• Net company profit £40,500 

• Dividends payable to individual £40,500 

• Tax Liability on dividends @ 33.75% £13,500 (s.t £500 tax free allowance) 

• Net Dividend income £27,000 

 

In this example John will earn £3,300 more income if the properties were owned by a limited company. 

 

Yes. Although limited company mortgages tend to have higher fees. Also, limitations on mortgage availability may exist as fewer providers tend to lend to a company, 

 

 

If the property has been transferred to a limited company, income generated from the sale of the property will remain in the company. The gain on sale will not be subject to CGT but will be subject to corporation tax. Company directors can only then access the sale profits through the issue of dividends which as discussed above will attract income tax for the individual. 

 

For an individual landlord, sale proceeds on a buy-to-let property are easier to access and will be taxed only once. This is in the form of CGT on the property value increase since the point of acquisition (plus property enhancement costs). The remainder of the sale proceeds will be tax-free. 

 

 

As an alternative option you may consider leasing out your property through a property management company, of which you are the shareholder. The property management company will charge a management fee for handling the rental property before transferring the balance of the rent to you as an individual. This option can reduce your rental income and higher rate tax liability at 40%. You will however need to seek legal advice how to set out the contractual relationship with yourself, your tenant and the property management company. 

 

 

On the whole, it seems that if you only have one property then trading as an individual landlord may be more cost and tax efficient. If however, you are reaching the basic rate tax upper threshold of £50,271 or plan to develop a growing buy-to-let property portfolio then perhaps it may be advisable to consider moving or setting up your properties within a limited company structure..