In the past few years, the tax regime under which landlords are operating has become ever more onerous – not least the steady erosion of the buy to let investor’s ability to claim tax relief on mortgage interest repayments and the payment of tax on the income received by the landlord rather than the profits on his business.
According to the website Property Wire, the introduction of a ban on lettings fees, which was announced in November of 2016, has been responsible for a further spike in the number of landlords selling their buy to let properties.
By transferring your buy to let properties into a limited company, there may be savings to be made with respect to the corporation tax then payable, compared to the new rates of income tax for which individual owners are liable.
The Daily Mail’s money pages work through a number of examples, to illustrate the potential financial benefits of incorporation but also echoes most commentators’ views that moving to a limited liability company structure is likely to be worthwhile only if you own a portfolio of buy to let properties – together worth more than £1 million, for instance.
The costs of incorporation
When weighing up the comparative advantages, of course, it is important to take into account the additional, different, costs of corporate ownership.
This argument is taken up by an article which appeared in Tax Insider in June 2017 which also compared the benefits of incorporation versus continued private ownership with reference to some of the costs involved:
- setting up a company in the first place incurs a cost – in legal fees and incorporation itself (although registration attracts a modest fee of only £12);
- as a company, you must file an annual return to Companies House – incurring a further nominal fee of £13;
- your company needs a registered office and most people prefer to use an address other than their home address – this is a facility offered by many firms of accountants, who are likely to charge an annual fee of around £100, depending, of course, on the size of your company and the amount of correspondence which needs to be handled at the registered address;
- you are also likely to need to switch your current business account at the bank to a company account – and may find any rate of interest you earn on that account is reduced as a result;
- you are likely to need the services of an accountant to produce the audited accounts of both your company and the personal incomes of your shareholders and directors – the fees are likely to vary quite widely, depending on the firm you choose and the size and complexity of your operations, but Tax Insider suggests that you allow for a minimum of £250; and
- probably the biggest additional cost is likely to come from the need to remortgage the properties in your portfolio in order to move it from personal into corporate ownership – and the remortgage may prove more expensive than your current buy to let repayment costs.
Although incorporation might seem to offer an attractive avoidance of the tax regime currently challenging individual landlords, any move needs to be considered very carefully and the associated costs taken fully into account.
Further reading: CGT challenges when incorporating a property business