What are the tax liability advantages vs disadvantages
Investing in residential property as a buy-to-let venture has become increasingly popular, attracting both private landlords and corporate entities. However, the choice between holding buy-to-lets in a limited company or personal name carries significant tax advantages and disadvantages.
In this blog post, we explore the advantages and disadvantages of each approach, with a focus on tax liability, tax benefits, and related considerations.
Advantages of Buy-to-Lets as a Limited Company
Tax Efficiencies: One of the primary advantages of holding buy-to-lets as a limited company is the potential for tax efficiencies. Limited companies pay corporation tax on their profits, which currently stands at a lower rate compared to income tax for higher rate taxpayers. This means that rental income generated by the company can be subject to lower tax rates, leading to potentially higher after-tax profits.
Tax Relief on Mortgage Interest: Unlike individuals, limited companies are still eligible to claim tax relief on mortgage interest payments for buy-to-let properties. This allows landlords to offset their mortgage interest against rental income, reducing their taxable profit. In contrast, it’s important to note that the availability of tax relief for mortgage interest for individuals owning the property has been gradually reduced in recent years.
Inheritance Tax Benefits: Holding properties in a limited company can offer potential inheritance tax advantages. Shareholdings in the company can be passed on to heirs without being subject to inheritance tax. This can provide greater flexibility and ease of transfer compared to personal ownership, where the property may be subject to inheritance tax.
Tax Band Considerations: Personal landlords who are higher rate taxpayers might find that the rental income pushes them into a higher tax bracket. By utilising a limited company structure, rental income is not counted as personal income. Therefore, it can help higher rate taxpayers avoid moving into a higher tax band.
Advantages of Buy-to-Lets in a Personal Name
Simplicity and Lower Costs: Holding buy-to-let properties in a personal name is generally simpler and less costly compared to setting up and maintaining a limited company. There are no incorporation fees, annual filing requirements with Companies House, or the need to hire professionals for company administration. This can be particularly advantageous for individual landlords with smaller portfolios or those who prefer a straightforward approach.
Greater Mortgage Availability: Securing a buy-to-let mortgage as an individual can be more accessible and potentially offer more favourable terms compared to limited company mortgages. Lenders typically have a wider range of mortgage products available for individuals, including competitive interest rates and lower arrangement fees. This increased availability can make it easier for individuals to finance their buy-to-let investments.
Capital Gains Tax Allowances: Holding properties in a personal name provides access to capital gains tax annual allowances. This allows individuals to benefit from tax-free gains up to a certain threshold each tax year. By strategically timing the sale of properties and utilising these allowances, individuals can minimise their capital gains tax liability, potentially increasing their after-tax profits.
Tax-Free Allowances: Personal ownership allows individuals to take advantage of various tax-free allowances, such as the personal allowance and the annual savings allowance. The personal allowance allows individuals to earn a certain amount of rental income tax-free each year, while the annual savings allowance provides tax-free interest income. These allowances can help lower the overall tax liability on rental income.
Flexibility in Income Distribution: Holding properties in a personal name allows greater flexibility in distributing income among family members. If a spouse or partner is a lower or non-taxpayer, it is possible to allocate a portion of the rental income to them, potentially reducing the overall tax burden on the rental profits. This income-splitting strategy can be advantageous in optimising the tax efficiency of the rental income. Please note a specific form has to be completed for this income split.
It’s important to note that the advantages listed above may vary depending on individual circumstances, tax regulations, and changes to tax laws. Consulting with a qualified tax advisor or accountant is recommended to fully understand the specific advantages and implications of holding buy-to-let properties in a personal name.
Disadvantages of Buy-to-Lets as a Limited Company
Set-up and Administrative Costs: Establishing and maintaining a limited company involves expenses such as incorporation fees, annual filing fees, and the potential requirement for professional assistance. These costs can be higher compared to operating as a private landlord in a personal name, where the administrative burden may be comparatively lower.
Mortgage Availability and Costs: Acquiring a buy-to-let mortgage for a limited company can be more challenging and expensive compared to personal mortgages. Limited company mortgages typically have higher interest rates and stricter lending criteria. Additionally, lenders may require personal guarantees from directors, increasing the potential liability.
Double Taxation: Limited companies are subject to corporation tax on their profits, and if dividends are distributed to shareholders, they are also liable for dividend tax. This can result in double taxation, where the company pays tax on its rental income, and shareholders pay tax on any dividends received. It’s crucial to consider the overall tax implications and the impact on the net income available to shareholders.
Reduced Tax-Free Allowances: Individuals are entitled to certain tax-free allowances, such as the personal allowance and the annual capital gains tax exemption. These allowances may not be fully available when holding properties within a limited company. Thus, personal ownership may provide more opportunities to benefit from tax-free allowances.
Disadvantages of Buy-to-Lets in a Personal Name
Higher Income Tax Rates: Holding buy-to-let properties in a personal name can subject landlords to higher income tax rates. As rental income is considered personal income, it is added to other sources of income, potentially pushing individuals into higher tax brackets. Higher rate taxpayers may face a significant portion of their rental income being taxed at higher rates, reducing their after-tax profits.
Reduced Tax Deductions: Personal landlords may face limitations on tax deductions compared to limited companies. For example, mortgage interest relief for individuals has been phased out, and since April 2020, it has been replaced by a basic rate tax reduction. This change can result in a higher tax liability for individuals with substantial mortgage interest costs, impacting their overall profitability.
Limited Liability Protection: Holding buy-to-let properties in a personal name exposes landlords to personal liability for any legal claims or disputes related to the property. This means that personal assets, such as savings and other properties, could be at risk if a substantial claim arises. Limited companies, on the other hand, offer a level of limited liability protection, separating personal assets from those of the company.
Inheritance Tax Considerations: While personal ownership may provide some capital gains tax advantages, it can have implications for inheritance tax. Properties held in a personal name may form part of the individual’s estate for inheritance tax purposes, potentially subjecting the property to tax liabilities upon death. Limited companies, in contrast, may offer more flexible and efficient inheritance planning options.
Difficulty in Scaling and Portfolio Expansion: Holding properties in a personal name can present challenges in scaling and expanding a buy-to-let property portfolio. Personal ownership can limit borrowing capacity as lenders may consider personal income and existing mortgage commitments when assessing affordability. Limited companies, however, may have access to alternative financing options and can leverage the company’s assets to acquire additional properties.
Administration and Compliance: While personal ownership offers simplicity in some respects, it also entails administrative responsibilities and compliance obligations. Personal landlords must manage and maintain records related to rental income, expenses, and property management. They also need to comply with relevant tax regulations, file self-assessment tax returns, and stay up to date with changing tax laws, which can be time-consuming and require financial organisation.
By conducting thorough research and understanding the pros and cons of buy to lets as a limited company, investors can make informed decisions about the most tax-efficient and financially advantageous approach for their buy-to-let investments in residential property.
Let Passman Leonard help you with important property tax decisions
Choosing between holding buy-to-let properties as a limited company or in a personal name requires careful consideration of the tax implications and other relevant factors. Seeking guidance from tax advice and planning professionals is crucial in understanding personal ownership vs limited company.
While limited companies offer potential tax efficiencies, tax relief on mortgage interest, and inheritance tax benefits, they come with additional costs, administrative burdens, and potential double taxation. Personal ownership, on the other hand, may provide simplicity and access to various tax-free allowances.
Our property tax advisors can help you minimise your property tax with our extensive knowledge of both the landlord and property business market, so you can make the best decisions on how to manage your property, and get the best return from your investment. Our team of property tax advisors is dedicated to providing personalised attention and practical solutions that align with your specific needs.
Looking for advice on Buy to lets as a limited company? Get in touch today via email info@passmanleonard.co.uk or call on 01895 434515.
