The low-down: tax on limited company property transfers

The reduction in mortgage interest tax relief for buy-to-let properties has sparked renewed interest among landlords in the benefits of owning their properties through a limited company. On paper, it appears to be a more tax-efficient option – the corporation tax paid by companies is set at a lower rate than the income tax paid by individuals. However, the tax implications don’t stop with those two taxes. Here’s the low-down on the other taxes that are triggered when ownership of a property is transferred to a limited company:

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is payable whenever ownership of a property is transferred to a limited company. Even if it is sold to the company at less than its market value, the tax is payable on its full market value.  

However, it is always worth seeking advice. Under certain circumstances it is possible to request a reduction in SDLT. For example, when two or more properties are transferred to the company the SDLT will be assessed on a specifically-calculated average of the combined value of the properties.

Capital Gains Tax

Transferring a property to a company counts as a sale for capital gains tax purposes. That means capital gains tax at 28% will be chargeable on any increase in the property’s value since it was purchased. Again, it is worth seeking advice. The deal may qualify for reliefs or deferrals that would reduce the tax burden.

Corporation Tax

A property-owning limited company will be eligible for mortgage interest tax relief, but it will still have to pay corporation tax. Landlords should seek advice about the exact rate of corporation tax which their company will owe.  

Taking an income from your property-owning limited company

Landlords who wish to earn from their properties will have to take their income from the company as dividends. The way in which these sums of money are taxed is currently in flux. The government has recently both increased the tax on dividends and reduced the tax-free sum allowed as dividends. Again, take advice because more changes may follow.

Tax on selling

The profits from the sale of a property owned by a limited company will attract further corporation tax. The landlord will also have to pay tax on the share of profits from the sale that she or he receives, whether as salary, dividend or through other methods. 

Other hidden costs

Early repayment charges may become due if a recently mortgaged property is transferred into a limited company. It’s worth remembering that although limited companies can set the mortgage interest of a rental property against tax, the higher rate of interest usually charged on mortgages to companies means that total interest payable over the years is likely to be greater than the interest payable by an individual property owner. 

Ownership and risk: once the company owns the property, it becomes a company asset. As such, if anything happens to the company, the property may be at risk.

Is it ever worth it?

As a rule of thumb, most authorities suggest that transferring properties to a limited company is only financially worthwhile when landlords have four or more properties to transfer. For landlords with only one or two properties, it is usually more profitable to remain a buy-to-let individual and simply pay the extra income tax.  

However, it’s always worth taking professional advice and doing the sums properly. Why not contact us?  

Getting in touch

ANDREW REEVES - Westminster

81 Rochester Row, Westminster, London SW1P 1LJ
Sales: 02078811310
Lettings: 02078811315

ANDREW REEVES - Pimlico

63 Lupus Street, Pimlico, London SW1V 3EY
Sales: 02078811320
Lettings: 02078811325