Is it possible to benefit from setting up a company just to manage BTL properties?
Many landlords are considering moving their portfolios into limited companies in advance of the buy to let tax relief changes – but is it possible to benefit from setting up a company just to manage the properties?
Background – how is BTL tax relief changing?
The government is planning to gradually remove full relief on buy to let mortgage interest and replace it with a basic rate (20%) reduction.
The incremental transition will take place between 2017 and 2020.
This is intended to affect only higher and additional rate landlords. But when claiming a reduction instead of full relief, it is possible to pay tax on losses, meaning even basic rate landlords could be affected.
But corporation tax is also changing
In 2017, corporation tax will be cut from 20% to 19%. It will be cut again, to 18%, in 2020. (Source: www.gov.uk.)
This means that some landlords, particularly those on higher tax bands, may be able to save money by running some or all of their property business through a limited company structure.
Using a limited company to manage property
Many landlords are considering setting up a limited company to manage, but not own, their properties – effectively providing the services of a letting agent.
This involves collecting rent via the company, withholding management fees, and passing the remainder back to the property owner (the landlord). The remainder is taxed at the landlord's normal rate, whilst the fee income held by the company is subject to corporation tax.
Fee income can be retained within the company
From April 2016, money taken from limited companies as dividends will be taxed, after a £5,000 allowance, at 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate). (Source: www.rossmartin.co.uk.)
However, it is possible to retain the profit within the company. This can be saved for future trading activity (such as the purchase of more property with the limited company as the owner), or withdrawn when the recipient is no longer a higher rate taxpayer (such as during retirement).
Things to bear in mind
Firstly, it is important that the company is a genuine trading operation. Therefore, the property owner and the management company must be separate entities.
This means that there must be an official contract of business; that the company must issue rental statements; and that the company's accounts and records must be kept strictly separate from the landlord's.
Furthermore, the fees charged must be similar to those charged by other management companies. In essence, the company must behave like a letting agent in every respect. Otherwise, HMRC may consider it an investment activity and not a trading business – meaning the tax treatment will be less favourable.
It is also important to consider the cost of running and auditing a limited company and how it compares to the potential tax savings. The larger a landlord's rental income, the more worthwhile this strategy can be – but also be wary of the fee income exceeding the VAT threshold.
What about simply owning the property through the company?
Transferring ownership of a property to a limited company (known as 'incorporation') can entail both capital gains tax (CGT) and stamp duty land tax (SDLT) liability, making this a costly option.
This is not the case for property purchased through a company; however, corporation tax will be payable on the proceeds of any sale. This might be a lower rate than CGT, but will not be subject to the personal CGT allowance.
Many of these decisions will come down to whether the landlord in question is focussed more on generating income or capital. But as everyone's situation is different, the most tax-efficient option for one investor may not be the best option for another.
The best approach, as in many such cases, is to seek the advice of a professional accountant or tax advisor.
By Ben Gosling at www.commercialtrust.co.uk.
This article is for information purposes only, and should not be taken as advice.