It’s time to take a closer look at the purchase-lease in limited company
“Calculating the best outcome for any buyer-renter client can get very technical! This is why mortgage brokers cannot give advice in this area and must refer clients to a qualified tax advisor.”
A second wave is expected over the next few years as the impact of rising interest rates ripples through homeowners’ profits, further incentivizing them to restructure the way they own their properties for maximum tax efficiency.
Placing a rental property in a limited liability company can have many advantages. Homeowners can still offset 100% of their interest payments against their tax bill – relief that is no longer available for personal purchases. Rental income is taxed at the 19% corporate tax rate, rather than the owner’s personal tax rate, which makes incorporation particularly attractive for higher and higher taxpayers. And LLCs are also more flexible in many ways, allowing owners to access the equity in their properties through director loans, for example.
But they can come at a cost – and it’s a tax advisor’s job to calculate whether that cost is worth paying for your clients, because each individual’s situation is different. As a broker, you must know the basic rules so that you can inform your client, but never advise him.
When an owner transfers property to a limited liability company, the process is called “incorporation” and is considered a financial transaction – the company effectively buys the property from the individual. As a result, the owner must pay stamp duty as they would for any purchase, but generally charged at the higher rate (+3%) for second homes. If the property has increased in value, they must also pay capital gains tax on the amount of the increase. A base rate taxpayer with an income of £50,000 or less will pay 18%, a higher rate taxpayer earning over £50,000 will pay 28%.
Everyone gets an annual capital gains tax deduction which is tax free – at present it is £12,300 so tax is only payable on everything gain above this amount, and costs such as initial stamp duty paid, solicitor and estate agent. fees, appraisals and appraisal fees and costs related to improvements can be deducted from the gain to reduce the tax burden.
Another useful concession is the relief from incorporation, which defers any taxable gain until the shares of the company are sold. However, not all landlords are eligible for this relief, as it is only available to businesses, and the passive letting of a property to a tenant is not considered business by HMRC. In order to qualify for incorporation relief, a landlord must be able to demonstrate that they spend at least 20 hours per week actively managing their portfolio and providing services to their tenants, so that no rental agent cannot be involved. They must also be in a partnership, which their accountant can set up with HMRC (variations are allowed for single owners).
As you can see, calculating the best outcome for any buyer-tenant client can get very technical! This is why mortgage brokers cannot give advice in this area and must refer their clients to a qualified tax advisor. But what brokers can do is generate two European standardized information sheets at the start of the mortgage buy-to-let process, one personal and one limited company. It is important at this stage to make your client understand that he should not be influenced by the overall interest rate. Limited liability company borrowing rates tend to be higher than personal rates, but once tax breaks and abatements are factored in, the numbers can tell a very different story.