Changing from a residential to a buy to let : ltd vs under personal name

kelster101757

I've purchased my first house by myself and 7 years later I now have a child and a partner and want a new larger house with my family. I want to rent out my current (first) house that I own by myself and buy the new house with my partner. The first house is in the City Centre and easy to find a tenant that covers the rent with profit.  I bought the house for £156,000 and its now worth £240,000, a difference of £84,000.  I'm wondering if its worth renting out in my own name or transferring it to a limited company mainly to reduce tax e.g, capital gains .  Does anyone have any advice on which would be the best option? or how I can find out more about this topic?

Schwarzwald

Speak to your tax advisor.

transfer to a Ltd from your own name unlikely to be tax efficient as likely triggering second stamp duty charges as property owner is changing, plus keep in mind that Ltd mortgage costs are significantly highe than personal liability mortgages in your own name.

even without knowing details, would be surprised this makes economic sense

anselld

It will probably not reduce Capital Gains Tax.  Ltd Co would pay corporation tax on capital gains anyway, may or may not be higher or lower than future CGT depending on rules and circumstances at the time.  However...

  (1)  Ltd Co gets no quivalent of the CGT tax free allowance

  (2)  Upon transfer to the Ltd Co you would lose all Private Residence Relief on the property.

Ltd Co would still pay 3% SDLT on market value when it aquires the property from you.

Ltd Co Mortgage rates are a bit higher but not stupidly so.

There are set up fees and annual filing fees to consider unless you want to DIY your own paperwork.

The only marginal saving would be that you pay 3% SDLT surcharge on the lower value property.

There are also some minor fringe benefits, for example you can pay yourself paye from the profits and effectivly make the rental income pensionable which it would not normally be.

The bottom line is that Ltd Co ownership is only normally beneficial if you are already a higher rate tax payer and if you wish to retain profits long term inside the Company, eg to grow a portfolio. 

 

macman

Are you prepared to carry out the multiple onerous duties of a professional LL? 

silvercar

Transferring it to a company means you are selling and the company buying it. The upside would be that you wouldn't have to pay the extra stamp duty on the new place, that you would if you kept the property and bought a new one. So immediately you are saving 3% of the new property costs.
 
The downside is the mortgage interest rate will be higher, but the gain is that mortgage interest is an allowable expense of the limited company. For high mortgage properties this can be a big saving. If you are not mortgaging the current property, the limited company can repay you the costs of the property tax free as the company will be repaying the director's loan that it used to buy the company off you.

There are also consideration of future tax charges on the limited company and any future gains in the property value are locked inside the company.

I would suggest an accountant could advise according to your circumstances.

K_S

kelster101757 said:

I've purchased my first house by myself and 7 years later I now have a child and a partner and want a new larger house with my family. I want to rent out my current (first) house that I own by myself and buy the new house with my partner. The first house is in the City Centre and easy to find a tenant that covers the rent with profit.  I bought the house for £156,000 and its now worth £240,000, a difference of £84,000.  I'm wondering if its worth renting out in my own name or transferring it to a limited company mainly to reduce tax e.g, capital gains .  Does anyone have any advice on which would be the best option? or how I can find out more about this topic?

@kelster101757 Very very generally speaking, holding a rental property in a ltd.co.SPV may be worth considering if you are a higher rate taxpayer (or expect to be in the near/medium term AND expect to build a portfolio over time. If this is likely to be your only rental property, it's unlikely to be worth the hassle and ongoing admin+costs.

There is lots of information online on the different pros and cons of ltd.co.SPV vs personal BTL.

If you do decide to go down the ltd.co.route, my only strong suggestion would be that you incur the cost of a property accountant advising you on how to structure the ltd.co. correctly from the get go. While I'm not a tax expert by any stretch of imagination, I've seen many times the contrasting cases where couple-clients have set it up properly with advice (using alphabet shares, holding company structure, etc. depending on the specific client circumstances) vs those who DIY'd the initial setup, built a portfolio but struggled to extract profits efficiently and eventually had to engage someone to sort things out properly and advise them on the most tax efficient ways to extract profits. If you are a married couple, using a limited company structure can potentially afford you a lot of flexibility to take out profits efficiently.

kelster101757

Schwarzwald said:

Speak to your tax advisor.

transfer to a Ltd from your own name unlikely to be tax efficient as likely triggering second stamp duty charges as property owner is changing, plus keep in mind that Ltd mortgage costs are significantly highe than personal liability mortgages in your own name.

even without knowing details, would be surprised this makes economic sense

Thanks :-)  I'm going to get charged the 3% 2nd home for my next property which will be more so im hoping transferring the 1st home (which is less value) out of my name into a ltd company will stop me paying it on my 2nd home purchase (more expensive). Thanks for the tip on mortgage cost for a ltd company.

kelster101757

macman said:

Are you prepared to carry out the multiple onerous duties of a professional LL? 

Whats the difference between being a lanlord in a ltd and being a lanlord in a personal name?

kelster101757

silvercar said:

Transferring it to a company means you are selling and the company buying it. The upside would be that you wouldn't have to pay the extra stamp duty on the new place, that you would if you kept the property and bought a new one. So immediately you are saving 3% of the new property costs.

The downside is the mortgage interest rate will be higher, but the gain is that mortgage interest is an allowable expense of the limited company. For high mortgage properties this can be a big saving. If you are not mortgaging the current property, the limited company can repay you the costs of the property tax free as the company will be repaying the director's loan that it used to buy the company off you.

There are also consideration of future tax charges on the limited company and any future gains in the property value are locked inside the company.

I would suggest an accountant could advise according to your circumstances.

Thanks for the detailed reply.  Yeah, 3% on 2nd home stamp duty is a not small money, especially if we move more than once so potentially a big saving.  Good to know about the directors loan. Thanks for pointing out the future risk, appreciate the effort to respond.  

macman

kelster101757 said:

macman said:

Are you prepared to carry out the multiple onerous duties of a professional LL? 

Whats the difference between being a lanlord in a ltd and being a lanlord in a personal name?

Limited liability, and corporation tax rather than income tax. 

kelster101757

@kelster101757 Very very generally speaking, holding a rental property in a ltd.co.SPV may be worth considering if you are a higher rate taxpayer (or expect to be in the near/medium term AND expect to build a portfolio over time. If this is likely to be your only rental property, it's unlikely to be worth the hassle and ongoing admin+costs.

There is lots of information online on the different pros and cons of ltd.co.SPV vs personal BTL.

If you do decide to go down the ltd.co.route, my only strong suggestion would be that you incur the cost of a property accountant advising you on how to structure the ltd.co. correctly from the get go. While I'm not a tax expert by any stretch of imagination, I've seen many times the contrasting cases where couple-clients have set it up properly with advice (using alphabet shares, holding company structure, etc. depending on the specific client circumstances) vs those who DIY'd the initial setup, built a portfolio but struggled to extract profits efficiently and eventually had to engage someone to sort things out properly and advise them on the most tax efficient ways to extract profits. If you are a married couple, using a limited company structure can potentially afford you a lot of flexibility to take out profits efficiently.

I doubt I would be making a bigger portfolio, most likely just this one. What is the extra hassle and ongoing admin+costs compared to doing it yourself?  I'm not married and not looking to get married but who knows, maybe when the little one growing up.  Thanks for the tip on the setup of the accounts :-)