With the changes to mortgage interest relief for buy-to-let landlords, many are now considering transferring their properties and are actively looking at ways to reduce their tax burden.

Below, Jonathan Amponsah of The Tax Guys looks at the pros of cons of establishing a buy-to-let business as a limited company and the tax implications you need to be aware of.

Tax rules for buy-to-let (BTL) landlords are changing – and this could mean higher tax bills.

Landlords will no longer be able to deduct all of their finance costs from their property income. The changes are being phased in between April 2017 and 2020.

However, this change doesn‘t apply to limited companies. So, unsurprisingly many BTL landlords are considering transferring their properties into a limited company, enabling them to continue to claim tax relief on all the interest and finance costs.

On the surface this decision appears to make business and financial sense. But… you may find yourself landed with unnecessary tax bills and costs.

Here are five common pitfalls to be aware of:

  • Capital Gains Tax. If you transfer the property to the company, this will be treated as if you’ve sold the property to the company. If the property has gone up in value since you originally bought it, you’ll have to pay up to 28% capital gains tax on the difference, subject to any tax reliefs and allowances. If you have a few properties to transfer, seek advice about a relief you could claim to defer your capital gains tax.
  • Stamp Duty Land Tax. If you transfer the property from yourself to the company (effectively the company buys the property) then the company could become liable to pay stamp duty land tax. So while you reduce income tax, you may wind up paying the same amount or more in stamp duty land tax.

These two main tax pitfalls could potentially wipe out any short term tax savings.

  • Once the property is transferred, it is owned by the company, not the landlord. If something happens to the company, all its assets will be exposed including the property that you put in it.
  • Your Mortgage. If your company needs a mortgage to buy the property from you then watch out as in most cases the interest rate is higher for commercial or company mortgages than it is for individuals. So, you could end up paying a lot more over the full term of the mortgage.
  • At some point in the future if you sell the property the company will pay Corporation Tax on the profits and the balance of the money from the sale will remain in the company. In order to get access to the funds to enjoy you’d need to take it out of the company either as salary or dividends or other means. You’d then pay additional tax on that income. When you take the above into account the idea of transferring your BTL property into a limited company starts to sound rather bleak.

But there are some situations where you can reduce or eliminate the pitfalls above and enjoy some of the benefits of holding your properties through a limited company.

  • If you’re buying a new property then a limited company could be a good idea. But if it’s an existing property and you’re only managing one or two properties, I’d say: don’t bother. You’re better off paying just a little bit of tax now instead of triggering all these taxes and then having to pay additional double tax if you sell the property in the future.
  • Partnerships – If you currently run your BTL through a properly arranged partnership business, then transferring into a limited company could be a good idea because some of the tax burdens above could be reduced.
  • Legacy planning. Landlords who want to leave their BTL properties to their children could consider the pros and cons of a Family Investment Company as an alternative to a Trust.

Clearly the message here is; don’t rush into it. It’s extremely unwise to move BTL properties into a company without taking professional advice. Whilst there’s no simple answer to the question and it all depends on your circumstances, as a general ‘rule of thumb’ I would say that if it‘s only one or two existing properties in your name, it‘s not a good idea. If you‘ve got 6-10 properties, it‘ might be worth your while to look at how you can enjoy the benefits of a limited company without triggering unnecssary taxes and costs.