We look elsewhere at the changes that have occurred, and which will occur in the next three years, in the tax relief on interest on residential property lettings. These changes affect individual landlords. However, they do not apply to limited companies. This has led to many people asking whether they should transfer their residential properties to a limited company.
The question is easy. However, the answer is not so clear-cut. Both the costs and the benefits should be considered before any decisions are made.
The first potential cost to be considered is Capital Gains Tax. Transferring property to a limited company is a disposal for Capital Gains Tax purposes, and will trigger a Capital Gains Tax liability if the value of the properties transferred have increased since they were acquired. All individuals have a CGT allowance of £11,300 for the current tax year. Any gain above that will be taxable at 18%, or 28% on any gains which, with other taxable income, takes total income above the basic rate threshold. Please note that the recent reduction in Capital Gains Tax Rates to 10% and 20% do not apply to gains on residential properties.
It is also possible to envisage situations where Capital Gains Tax may become payable when less would be payable without the transfer. For instance, the value of the property on transfer may be lower than the original cost and the resulting loss cannot be offset. However, that lower value will be the base cost when the property is subsequently sold.
The second potential cost is stamp duty. A company acquiring one or more residential property will incur stamp duty of 3% up to a value on each property of £125,000 and 5% on any surplus above that.
The third potential cost is the normal legal costs such as solicitors’ fees and land registration fees.
The fourth potential cost is the dividend tax payable on any dividends declared on profits after Corporation Tax, assuming you wish to take those profits out of the company. Those dividends will incur dividend tax of 7.5%, or 32.5% if total income exceeds the higher rate tax threshold.
There are potential tax savings on any income from the rented properties that can be offset against these potential costs.
Firstly, there is no restriction on the deduction of loan interest against rental income. As stated above, the restrictions recently introduced for individuals do not apply to companies.
Secondly, any profits that are not distributed but are retained within the company will be taxed at the Corporation Tax rate of 20% compared to possibly the higher tax rate of personal tax of 40%.
However, in conclusion, nearly every paragraph above contains the word “potential”. The cost/benefit of transferring rental properties to a limited company will depend on the individual’s own circumstances and cannot be generalised. And this is without trying to incorporate differences in Capital Gains Tax on the eventual disposal of the property resulting from:
- The difference in the rates of Capital Gain Tax payable by a company and an individual
- The fact that a company does not have an annual tax-free allowance whereas an individual has an annual tax-free allowance, currently £11,300
- The fact that a company only pays CGT on gains that exceed inflation, whereas an individual cannot offset inflation.
And finally, consider how long it will be before the rules all change again. One thing is certain. Consider the cost/benefit carefully and do not make a rash decision.
For more about what we can achieve for you on personal tax, read here