It is beneficial from a tax point of view to hold properties in a limited company. We don’t want to avoid tax but there is nothing wrong with tax efficiency.
Section 24 introduced tax changes that have affected many landlords in the UK. This little amendment to UK tax law in 2015, had a negative effect on me. I wasn’t a big fan of the then Chancellor, George Osborne.
This was to be phased in between 2017 and 2021. There would be 4 stages. Before Section 24, the BTL Landlord could offset their mortgage interest against their income. Let us call this 100% interest relief.
Every year, after 2017, 25% (one stage) would be taken away from this interest relief. So eventually, by 2021, you would have no interest relief.
In a nutshell, section 24 may well reduce your cashflow depending on your circumstances.
Transferring to your limited company
Before considering this option, it is worth discussing with your accountant. Your accountant will know your finances and what is best for you from a tax point of view.
You need to be aware that the company will be liable to pay stamp duty and CGT (capital gains tax). Stamp duty is based on the value of the property. Further details can be found on the gov.uk website (SDLT).
CGT is the difference between what you paid for your asset and what you sold it for. My understanding is that if you buy a property for £50k and sell it to your Limited Company for £50k you don’t pay CGT.
Depending on what you read, you may have to pay up to 28% CGT if it applies to your sale (Money donut). The sales from you (personal) to your company.
You will also have legal fees to consider when transferring your property to your limited company.
This is not financial advice! Speak to your accountant to confirm your position.
If you do move your properties to limited company, your mortgage products will be more expensive. But you will save on tax. This is something you will have to compare to make sure the company option is beneficial.
How did DUFF PROPERTIES do it?
To be honest, I haven’t had to do this. I went a different route. And I haven’t had the necessary chat with my accountant. If I did go down this route, he would have told me the tax implications so that I could make an educated decision.
With my 1st 4 properties, I transferred them over to Mrs Duffy as a declaration of trust. If your partner is a basic rate tax-payer, you can do this and section 24 won’t impact you.
What Mrs Duffy will do is pay 20% tax on any profit. If rental A, brings in £6k per year, that will be £1.2k in tax. That £1.2k figure minus 20% of the interest cost (e.g. £3k). See below:
- £6k in rent
- 20% of £6k = £1.2k in tax
- 20% of £3k (estimated interest cost) = £600
- £1.2k – £0.6k = £600 tax to pay
This is similar tax to what I would have to pay in limited company (e.g. 19% corporation tax etc etc). The big advantage of the declaration of trust in this instance is that I’ve avoided Stamp duty and potential CGT.
For a more comprehensive look at section 24 implications, see the property geek website – Property geek.
Another disclaimer – I am not a solicitor so please seek legal advice before attempting to do a declaration of trust in this manner.
What to do
If this situation applies have a good look into it. Do your own research. Don’t just take my word for it. Speak to the experts like accountants and solicitors.
If you have a small portfolio maybe keep them in your personal name. Or transfer to your partner as deed of trust.
Or you might want to build a decent size portfolio. If you are serious about being a property investor, holding them in a limited company is the way forward.
Book of the week: Perfecting Property Conversations by Rob McPhun. Personally, I’m a bit of an introvert so any book that improves my communication is right up my street. An excellent book that will help you in your property journey.
For a hard copy visit the excellent Imagined Things Bookshop: Imagined Things.