Transferring property to a limited company

Jojo_fry

Hi there, I wonder if anyone has got any advice or experience to offer with regards to moving a buy to let property to a limited company?

My partner is just completing on a flat which he is going to let out. He has a full time job, which means most of the rental income will now have to be taxed under the new rules, as the way I understand it he won't be able to offset the mortgage against the income.

I've heard that it may make more sense to use a limited company and pay flat rate corporation tax, however it is now too late to do this as he is about to complete on the sale.

Is it possible to transfer the property and how would he do this?

Cliveman_Pieman

How would the company afford to purchase the property?

davidmcn

If he's got a mortgage then he can't just transfer the property. The limited company would need to apply for a mortgage and buy the property from him. All a rather expensive and time-consuming affair unless there is a vast amount of tax to be saved.

00ec25

the company will need to buy the property from him. He can sell it to them for any value he wants to, but obviously he would have to repay the mortgage he took out in his own name as he will no longer be the owner so cannot keep the mortgage going. Is there an early repayment charge for his mortgage?

the company may, or may not, have to pay SDLT depending on the value they pay. Your partner may , or probably won't, have to pay Capital Gains Tax on any increase in value between what he paid to buy it and what he sells it to the company for.

is your partner already a higher rate taxpayer? If not then do you really understand that change in mortgage relief because the way you have written it implies you do not. If the owner is a basic rate taxpayer then (subject to the maths) there is no change at all in the amount of tax relief he will get since it will still be in full at 20%

the maths comes into it if the rental income will push him across the boundary from being a basic rate taxpayer to being higher rate
read the guide:
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

Jojo_fry

this isn't about tax avoidance it's about efficiency, which anyone on this forum is clearly concerned with or else they wouldn't be here. Corporation tax is still tax, it's just calculated differently and I'm trying to ascertain what the options are.

So yes, it seems he would need to set up a limited company, then apply for a mortgage and simultaneously buy and sell the property. This may be costly up front but may save money in the future, I'm just trying to work out whether it's worth looking into doing this.

00ec25

Jojo_fry wrote: »

I'm just trying to work out whether it's worth looking into doing this.

without numbers your question is impossible to answer

yes, long term (define long?) it is (under current rules) more tax efficient to own as a company. The costs of getting the property into a company are however high and may therefore be counter productive in the short - medium term.

Cliveman_Pieman

I fear you misunderstand the new rules regarding property taxation. Nobody will have the finance cost totally disallowed as you suggested in your first post. Although without figures it is all a guess.

Jojo_fry

Ok so he earns 36k, as I've understood it the threshold for higher rate tax is 42k? The rental income would push him into this tax bracket, if the mortgage payments cannot be deducted which seems to be what the new rules are.

00ec25

Jojo_fry wrote: »

Ok so he earns 36k, as I've understood it the threshold for higher rate tax is 42k? The rental income would push him into this tax bracket, if the mortgage payments cannot be deducted which seems to be what the new rules are.

please read the link I posted earlier, then come back when you have the correct understanding. Rental income less expenses (but not mortgage interest) = taxable profit. Profit is added to other income to give the tax bracket.

please read how mortgage interest relief is given as what you have written above is wrong. If he wants to be tax efficient then he needs to have a thorough understanding himself, not base key decisions on poor understanding obtained secondhand by skim reading or one liners from the internet

go back to basics?
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

HR threshold for 17/18 is £45,000
https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2017-18/tax-and-tax-credit-rates-and-thresholds-for-2017-18

dancing_star

the mortgage payments could not be deducted under old rules either.

Just the interest element. The change is limiting the rate at which the interest element is deducted from the tax charge.

Another factor to consider is that when the limited company sells the property, it does not have the annual exemption available that an individual does.

steampowered

If your partner wants to take money out of the company, he will have to pay income tax on that. It isn't only corporation tax that is relevant.