Buy To Let Tax Advice
Whether you are a new investor, already on your journey or looking for a portfolio restructure or exit strategy, we are here to answer the “what would happen if….” questions to enable you to make informed decisions on your future investment.
We examine one of the most frequently asked questions when considering buy to let investment.
Which is the Right Path for you?
When looking at buy to let (BTL) purchases, most people buy investment property personally or via a limited company.
Since the government changed the mortgage tax relief rules in 2015, buying property through a limited company has become increasingly popular, but is this the right path for you?
Your decision needs to take various factors into account such as the rate of personal income tax liability, the number of properties you own, your future goals and your inheritance tax plans.
For example, if you’re planning to sell any of your properties in the future you could end up having to pay double tax if you wish to withdraw the funds from the company, assuming your personal tax-free dividend allowance has already been used.
Consider your strategy
It may be worth holding some properties personally and others within a limited company.
For instance, if you’re moving house and wish to keep your current home as a BTL, it may not make sense from an income tax perspective to move it into a limited company, particularly if you are a basic rate taxpayer.
But, if the value of your new home is higher than your existing one, it can make sense to move it into a company so that you become eligible for the lower rate of stamp duty land tax (SDLT) on the purchase of your new main residence.
Examples
Say your current home is worth £200,000, and your new one is worth £800,000.
If you decided to keep your current home as a BTL in your personal name, your SDLT liability will be £54,000.
Alternatively, if you transfer your current home into a limited company your SDLT liability would be £7,500 on transfer and £30,000 for the purchase of your new home, a total of £37,500, saving you £16,500.
Transfer to Ltd Co Later?
Whilst this is possible, it needs careful consideration and tax-planning.
To make the transfer you need to sell your property to your new company which will incur costs which for some, can drastically reduce any tax savings in the medium or long term.
If there’s been an increase in the value of the property since you bought it, then you’ll have to pay Capital Gains Tax (CGT) on the profit. How much you pay will depend on your tax band. Lower rate taxpayers pay 18%, while higher rate taxpayers will pay 28%.
Your company will need to pay stamp duty land tax (SDLT} on the purchase, including the 3% second home surcharge.
Both of these taxes are calculated on the market value of the property on transfer into the company. If you are transferring a property that is currently mortgaged, you may also have a redemption penalty if you are locked into a fixed rate.
Inheritance Tax Considerations
Are you considering passing on your portfolio to future generations? Owning property in a limited company is generally considered a more tax efficient vehicle for passing wealth and income on but, as with all things property, planning is key.
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