If you are a buy-to-let landlord, is it a good idea to transfer your rental property to an LLC – from private ownership to a limited company?

Since the summer budget of 2015, the balance has shifted in favour of the limited company option, although like any tax matter, it does depend on the exact circumstances of each case. The reduction in interest rates relief for those paying mortgages has also led to increased tax bills for those whose rental property is not owned via a limited company.

From April 2017, the landlord tax relief on finance costs has been reduced. Landlords cannot now deduct all property finance costs from the income that property provides. These rules do not apply to limited companies, however.

Additional rental property

If you’re considering investing in additional buy-to-let property, the main factors to consider are as follows:

• Buy to let borrowers tend to pay higher interest rates if buying via a limited company
• There can also be higher costs for the associated administration
• However, if profits are retained in limited company, taxation costs tend to be lower
• Any profits taken from the limited company will also be subject to taxation

Existing rental property

You might decide that it makes sound financial sense to buy any future rental properties via a
limited company – but does that mean existing properties should also be transferred from personal ownership to a limited company?

Transferring the property might at first seem wise, as net profits would be taxed at a lower rate. There are, however, various costs that the transfer would incur. If a property is transferred from an individual to a company, it means the company must purchase the property.

As with all tax issues, there is no straightforward yes or no answer. It’s also possible that it would be best to treat each property purchase differently. As transferring property to a limited company means that the property must be legally sold, there are taxes that will apply. These are Capital Gains tax and Stamp Duty or land tax. If there is a mortgage, the lender may also charge early redemption fees, as well as fees for remortgaging if this applies.

Stamp Duty

If a property is sold to company the vendor owns, the law states that the transaction must be at open market value. Stamp Duty is therefore charged accordingly. The current rates will apply even if the property is gifted, sold at under market value or transferred in exchange for company shares.

2020-2021

Due to the COVID-19 crisis, special Stamp Duty rates apply until 31st March 2021. For this time period, no stamp duty is payable on purchases under £500,000, and 5% then applies to the next £425,000. Once a price exceeds £925,000, a rate of 10% is applied for properties that cost up to £1.5m. Any portion above £1.5m is charged at 12%.

2021-2022

From 1st April 2021, different rates will apply. The tax duty threshold is set at £125,000 from this date, with 2% charged for any portion between £125,001 and £250,000. A charge of 5% applies to any portion between £250,001 and £925,000. For properties with a market value of over £925,000, the same rates apply as during 2020-2021.

Capital Gains Tax

Capital Gains Tax is more complicated, and depends on whether HMRC see the property as an investment or a business. If the property is deemed a business, it becomes eligible for incorporation relief. If it is classed as an investment, then it is ineligible for relief. So how does HMRC work out whether a property is a business or an investment?

Again, there is no definite answer, but tax experts say certain factors could suggest one or the other. A property that is a business, for example, might well be run by the landlord, who spends time finding tenants, collecting rent and arranging or completing maintenance work. The property is also more likely to be seen as business if the owner can prove that it provides most of his or her income. In the case of an investment property, the owner may have other full-time employment that has nothing to do with the property. They are also more likely to use an agent for rent collection and property management.

The bottom line is that you could be liable for up to 28% Capital Gains Tax on any difference between the property’s original purchase price and its current market value.

Mortgage Redemption Fees

The sale of a property to a limited company will mean that any existing mortgages must be redeemed. The owner may also have to arrange a new mortgage. This will vary by lender and specific mortgage deal, so how much this may cost can vary very widely. The best way to find out is to request a Mortgage Redemption Statement from the lender. Additional costs might apply to arranging a new mortgage also – again, the lender or broker should make these clear.

Other disadvantages of transferring to a limited company

If the property is in a limited company and there are problems, the property will be exposed as an asset. Any future profit from the property sale would also go into the company. The company would then be liable for Corporation Tax. Removing any money as salary or dividends could also increase tax liability.

The advantages of transferring to a limited company

Sometimes transferring a property to a limited company does make financial sense. This particularly applies when purchasing a new property. If you already use a partnership, then transferring to a limited company may also lower the tax bill. If you want your offspring to inherit the property, then setting up a Family Investment Company could be a good idea too.

To transfer or not to transfer?

As a general rule, it doesn’t often make sense for owners of just one or two buy-to-let properties to transfer those to a limited company. For landlords who own six or more, however, it can be a shrewd move. Each case is unique, and here at Adaptive Accountancy we can work out the best way for you, based on your circumstances. We offer a range of accounting services in the Goole area, and are experienced in helping buy-to-let landlords to reduce their tax liability.