Here’s our advice

There are a myriad of options to consider both for and against using a company to hold residential rental properties. The main considerations are summarised below.

Following the Budget in July 2015 changes were announced to the way that personally held properties will be taxed with effect from 6 April 2016. Personal loan interest relief will be changing to only allow relief at basic rate by 2020, whereas in a company, this rental income would be considered business income and loan interest would get relief as an expense. An additional rate of Stamp Duty Land Tax (SDLT) of 3% will be due on second homes but, currently, this will also be applying to Companies. The SDLT and loan interest rules may change when the 2016 Finance Act becomes law.

Many taxpayers may be considering holding their rental properties in a company structure to limit the changes and to try to reduce their tax liabilities.

If you have purchased your buy to let by means of a personal loan/mortgage then, before you start to consider putting your property into a company, it is important to check whether your lender would be happy for you to change your status to a company. Some lenders will finance company purchases but the interest charges may not be as competitive.

When properties are transferred into a company there will be a capital gains tax charge as the ownership of the asset is changing. The value of the property transferred will be the market value and not the original cost of the property. This capital tax charge could be significant

The company would also be liable for SDLT on the purchase. Residential properties held in a company that exceed £500,000 in value may also be subject to the annual tax on enveloped dwelling (rate to be announced) and should the residential property be sold, a CGT rate of 28% will apply for those enveloped residential dwellings.

When considering the company route, it is important to consider profit extraction – how will the directors/shareholders be paid? Also, should the company sell the property, how will the shareholders be paid out without a double tax charge? How long will the company keep the property and will further properties be bought by the company? Setting up a company might be beneficial to those who have a portfolio of properties rather than just one unless the plan is to increase the property holding in the future.

The current tax rate for a company is 20% but this rate is planned to fall to 17% by 2020. For individuals the current rates of income tax are 20/40/45%.

The costs for running a company are higher and accounts must be lodged with Companies House. The tax impact should always be part of your overall planning consideration but it should not be tax alone that dictates your decisions. As always, do seek professional advice from your usual McCabe Ford Williams partner before making any decisions on the best structure for your property investments.

Phillip Kearsey
Tax Manager

Phillip is a Fellow of the Tax Faculty of Independent Financial Accountants (IFA) and initially trained with the Inland Revenue, now HM Customs & Revenue before working for a number of top 20 Accountancy Firms. Phil joined McCabe Ford Williams in 2007 and is the Tax Manager of our Herne Bay office.

He has also had experience advising on Expat tax for individuals based in foreign countries including the United States of America, Canada, Germany and Japan. In his career, Phillip has also written numerous articles for US newspapers and in addition given lectures on the subject of UK tax.

He is currently a committee member of Kent Chartered Institute of Tax (CIOT) and also a member of HMRC’s Working Together Group and McCabe Ford Williams’ own Tax Committee.