From Tax Savings to Hidden Fees: Is Selling Your Property to a Limited Company Really Worth It?
Since the changes to income tax relief for landlords in April 2020, many property owners have been seeking more tax-efficient ways to manage their rental income. As a result, selling property to a limited company has become a popular option. But is it the right choice for you?
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What Are the Advantages of Owning Property as a Limited Company?
One of the main benefits of owning rental property through a limited company is tax efficiency. As an individual landlord, you pay income tax on your rental income, which can be as high as 40% if you are a higher-rate taxpayer. However, if you transfer the property to a limited company, the rental profits are instead subject to corporation tax, which currently stands at 19% (although this can vary). This significantly reduces the tax burden.
Additionally, you may be able to use the equity you’ve built up in your property as a deposit for your limited company. This is often treated as a director’s loan, which allows you to reclaim the money at a later date. It can prevent you from needing to find a new deposit when selling the property to your company.
What are some of the key questions and considerations on selling your property to your limited company?
How do I go about selling my property to my limited company?
The process of selling your property to your limited company is similar to any other property transaction. You’ll need to account for legal fees, stamp duty, and possibly capital gains tax (CGT). It’s important to factor in these costs before proceeding.
What are the Stamp Duty Land Tax (SDLT) considerations?
When transferring a property to a limited company, the price can technically be as low as £1. However, Stamp Duty Land Tax (SDLT) is usually calculated based on the full market value of the property, not the sale price.
For properties valued over £500,000, corporate bodies typically face a 15% SDLT charge. However, there are reliefs available for companies involved in property rental businesses. It’s best to consult a tax advisor to see if you qualify for any SDLT relief.
What are the Capital Gains Tax (CGT) implications when transferring property to a limited company?
Capital gains tax (CGT) is another consideration when transferring your property. Even if you sell the property to your company for a nominal amount, CGT is usually still applicable. This is because, as the company’s director, you are considered a “connected person.” Before moving forward, it’s wise to consult a tax advisor to ensure you’re fully aware of the CGT implications.
Can I retain control of my limited company?
Yes, you can transfer your property to a company where you are the sole owner. There is no requirement for your limited company to be owned by someone else. This is because your limited company is treated as a separate legal entity, even if you’re the only shareholder and director.
Does my limited company have to be trading?
Interestingly, your limited company doesn’t need to be actively trading to own property. Companies that are not trading are referred to as “dormant companies.” Dormant companies can hold property indefinitely, but they still have administrative duties, such as filing annual accounts and tax returns with HMRC.
Will I need more than one solicitor?
If you are the sole director and shareholder of your limited company, it’s possible for one solicitor to handle the entire property transfer. However, if your limited company has other directors or shareholders, you may need separate solicitors for yourself and the company due to potential conflicts of interest.
What Are the Disadvantages of Selling Property to a Limited Company?
While the tax benefits are appealing, there are also some downsides to consider:
1) Mortgage Challenges: If your property has an existing mortgage, you may face early repayment fees. Additionally, when transferring the property, your limited company would need to secure a limited company mortgage, which often comes with higher interest rates.
2) Ongoing Administrative Duties: Even if your limited company only holds property, there are still administrative responsibilities that need to be completed. Failure to meet these obligations is a criminal offence and could lead to fines or your company being struck off.
3) Tax on Dividends: Extracting rental income from the company may incur dividend tax. Currently, the tax-free dividend allowance is £2,000, but anything over that amount is subject to tax. For higher-rate taxpayers, this means a tax rate of 33.75%.
final thoughts
Transferring property to a limited company can offer significant tax savings, particularly for higher-rate taxpayers. However, it’s essential to weigh the benefits against the potential drawbacks, such as mortgage costs and administrative duties. Consulting a qualified tax advisor before proceeding is crucial to ensure you make the best financial decision for your situation.
If you’re considering this option and would like more detailed advice, feel free to contact us for a free consultation.
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