Many buy-to-let investors are now considering transferring their properties into a limited company to benefit from tax advantages, including mortgage interest relief and lower corporation tax rates. While this strategy can provide long-term financial benefits, it’s essential to understand the potential tax implications and costs involved in the transfer process.
This guide explains the key tax considerations, benefits, and potential pitfalls of transferring properties into a limited company, helping you make an informed decision.
Key Tax Implications
1. Capital Gains Tax (CGT):
When transferring property ownership, you may need to pay Capital Gains Tax (CGT) on the increase in the property’s value since you originally purchased it.
How It Works:
CGT is calculated as the difference between the property’s market value at the time of transfer and its original purchase price.
The tax rate depends on your income tax band:
- 18% for basic rate taxpayers
- 28% for higher or additional rate taxpayers
Example:
- Original Purchase Price: £150,000
- Current Market Value: £250,000
- Gain: £100,000
- Allowance (2024): £6,000
Taxable Gain: £94,000
CGT (at 28%): £26,320
Exceptions:
If the property qualifies as part of a business (e.g., a property portfolio with multiple properties), it may be possible to defer CGT using Incorporation Relief.
2. Stamp Duty Land Tax (SDLT)
Your limited company will need to pay Stamp Duty Land Tax (SDLT) on the market value of the property at the time of transfer.
Key Considerations:
Higher SDLT Rates: Limited companies pay an additional 3% surcharge on residential properties.
The SDLT applies to the current market value, not the outstanding mortgage balance.
Example:
- Property Value: £250,000
- SDLT Calculation:
- Standard SDLT (up to £250,000): 5% = £2,500
- 3% Surcharge: £7,500
Total SDLT: £10,000
Exemptions:
Transferring properties within a partnership or through specific trust structures may qualify for SDLT relief, but these are complex and require expert advice.
3. Mortgage Considerations
When transferring a property with an existing mortgage into a limited company:
- The mortgage must be repaid or transferred into the company.
- This typically requires refinancing through a limited company buy-to-let mortgage, which may have higher interest rates.
- Lenders will assess affordability based on the company’s projected rental income and financial stability.
Tip: Work with a broker experienced in limited company mortgages to secure competitive terms.
Benefits of Transferring Property into a Limited Company
1. Mortgage Interest Tax Relief
2. Lower Corporation Tax
Limited companies pay Corporation Tax on profits (currently 19%), which is lower than higher-rate income tax rates (40% or 45%).
3. Retained Earnings for Growth
4. Inheritance Tax Planning
Case Studies
1: Reducing Tax Liabilities
Scenario: A landlord with three buy-to-let properties generating £30,000 annual rental income faces rising income tax bills.
Solution: The landlord transfers the properties into a limited company.
Before: £30,000 taxed at 40% = £12,000 tax liability.
After: £30,000 taxed at 19% Corporation Tax = £5,700 tax liability.
Savings: £6,300 annually, which can be reinvested.
2: Portfolio Expansion
Scenario: A landlord with five properties wants to grow their portfolio but struggles with personal borrowing limits.
Solution: By incorporating, the landlord accesses higher borrowing potential through limited company buy-to-let mortgages, enabling faster portfolio growth.
Pros and Cons of Transferring Properties into a Limited Company
Pros
- Long-Term Tax Savings: Lower tax rates and mortgage interest relief.
- Higher Borrowing Potential: More favourable stress tests.
- Reinvestment Opportunities: Retained profits for growth.
- Inheritance Tax Planning: Trust structures can minimise liabilities.
Cons
- Upfront Tax Liabilities: CGT and SDLT can be significant.
- Higher Mortgage Costs: Limited company rates are often higher than personal mortgages.
- Ongoing Costs: Accounting, legal, and administrative fees.
- Complexity: Requires professional advice and careful planning.
