Is it tax efficient to set up a company through which to own property?

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Due to the tax changes set to hit buy-to-let investors in 2017, thousands of landlords are considering setting up a company through which to own property, but is this a good idea?

These tax changes mean that buy-to-let investors with just one or two properties will see a fall in profits but a rise in their tax bill.

Buying or owning a property through a company is only useful for higher and additional-rate taxpayers, as the changes to tax relief likely to only affect them. It could be useful for basic rate taxpayers who when the new rules come in will have combined rental and other income over the £40,000 threshold for higher-rate tax.

The changes will be phased in, and will mean that landlords will pay tax on the entire rental income they receive rather than being able to deduct the cost of mortgage interest. This means higher rate and additional rate taxpayers will pay much more tax, and it could even mean that some landlords no longer make a profit. It is also worth noting that the 3% extra stamp duty levied on people buying second properties from April will also apply to people buying through a company.

However, landlords have discovered a loophole, which means that if they are structured under a company they are exempt from these changes and will pay corporation tax on any profit made.

However, this is a complicated solution and something not to be rushed into. Setting up a company to save money on your tax bill will only work for some investors, and there could be implications later on which landlords must be aware of before they proceed.

Landlords will need to set up a special purpose vehicle through which they will buy the property and this will require expert advice to ensure that all the paperwork is correct and in order.

If you have already bought a property and want to transfer it into a company, this will have its own tax implications. The property has to be sold at market value, and it has capital gains tax implications as well as potential stamp duty costs. If the property has increased in value since it was bought, capital gains tax may be payable on the sale, but you could exempt from this if the property is a business as opposed to an investment.
There are many factors that will determine if it’s a business or an investment, such as how much work the landlord does on the property day-to-day and how much direct management of the property is required.

There are specialist lenders that provide companies with buy-to-let mortgages and it’s actually easier to get a mortgage with a special purpose vehicle, which only holds properties, than a trading company, which can carry out other business. It is much easier to underwrite so the mortgages tend to be cheaper.

There are other implications of setting up a company through which to buy or own property, such as needing to complete annual returns and accounts.

If you would like to find out more and discuss if this is the right option for you, as a landlord, talk to Derngate Wealth today.

Some buy to let mortgages are not regulated by the Financial Conduct Authority.

Your home may be repossessed if you do not keep up repayments on your mortgage.

We do not charge for the initial consultation but there may be an administration fee payable when an application is submitted, this fee is usually £195 and we are also paid commission from the lender. Alternatively you could receive the commission from the lender and pay us a fee of an estimated £995.00.

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