Landlords – should they go LTD?

A few of our clients have recently asked me whether it’s worth moving their property portfolio into a limited company.

The reason for such a query being, that the government has been tapering down on the amount of interest a landlord can claim back since 6thApril 2017. In fact, from tax year 2020 it drops to 20% of finance costs (mortgage interest) after tax has been calculated on profits, unless your properties are in a limited company. If this is the case, then all 100 per cent can be claimed against profits.

What should you do then? Every landlord is different and the answer lies in their circumstances e.g. how many properties do they own, how long have they owned them etc?

Government figures show that 82% of landlords will not be affected by these recent governmental changes and reassuringly this would include landlords with only a few properties or those in a lower income bracket. The medium sized or larger corporate landlord would most likely take the hit.

One example would be to look at a fictious ‘Mr Jones’ who has 10 buy to let properties and income after general expenses / maintenance of £70,000. His interest payable on loans is £20,000. Pre-government tax changes his income from property would be £50, 000.

Under the new tax rules from next year his property income would rise to £70,000 on which he would be taxed. He can, after his tax calculation, deduct 20% of the mortgage interest from his tax bill e.g. £4,000.  But if his properties were in his own name i.e. Mr Jones (Properties) Ltd all his interest would be claimable so he would not incur any extra tax. Notwithstanding, Mr Jones may have other income from employment not shown above.

However, the act of ‘putting’ properties into a limited company is not as simple as one might think

There is stamp duty and other costs to consider when transferring properties to a limited company. The taxman will treat any transfer as a sale inevitably meaning CGT (Capital Gains Tax) will apply.

Mr Jones will clearly have to select which properties maybe best being transferred. For example, if eight of Mr Jones’ properties were purchased over 15 years ago, then, for argument’s sake, a house purchased for £50,000 in 2003 on an interest only mortgage of £45k for 25 years, would now be worth £120,000.

His costs would be transferring £3,600 of stamp duty, capital gains of £55,000 after allowances and would attract a CGT bill of £15,400. Valuation fees and solicitor’s costs haven’t even been figured into the equation yet, so with his bills some way north of the £20,000 mark, in this instance, clearly this property cannot be considered for his Limited company.

On calculating properties purchased more recently, i.e. approx. 4 years ago, Mr Jones may be in a position to put those two properties into his Limited company. Moving forward, if he was considering next year buying three more buy to let properties he would be best advised to put them straight into his limited company. It means he only pays stamp duty once and there are no capital gains to consider.

Also a lot of the costs associated with the purchases would be similar had he bought in his own name. It should be pointed out though a lot of lenders do charge a higher rate of interest for limited company loans but the fact of claiming ALL of the interest back should easily outweigh this cost.