Buy-to-let

ownership:
Buy-to-let ownership:
personalpersonal
or company? or company?

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C Last Updated: 20 September 2016

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A practice note for paid subscribers.

What works better, holding a buy-to-let property investment personally or via a company?

At a glance
Held personally

Held through company

Income Tax

Corporation Tax

Taxed on profits at marginal tax rate (up to 45%), regardless of

when the money is withdrawn from the business.

Profits and gains on disposal are taxed at corporation tax rate

(20%).

From 2016/17:

From 2017 the tax rate falls to 19%.

Rent-a-room relief (/land-a-property/1696-rent-a-room-relief) is From 2020 the tax rate falls to 17%.
raised to 7,500.
Withdrawal of the wear and tear allowance for furnished
properties and introduction of a replacement furniture
relief. See Replacement Furniture Relief (/admin/1897replacement-furniture-relief)
From 2017/18:
Buy-to-let landlords will no longer be able to receive higher
rate relief on mortgage interest or other finance costs.
See Restricting mortgage interest relief (/land-a-property
/1694-restricting-mortgage-interest-relief).
The removal of higher-rate interest relief might make
incorporation a more tax-efficient option for higher rate
taxpayers.

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Tax on disposal of the property: UK resident

Buy-to-let ownership: personal or company?

Subject to capital gains tax (CGT) at 18%/28%, after deducting

any available annual exemption.

Tax on disposal of the property: UK resident

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An indexation allowance is available to companies, tax due is at

corporation tax rates, as above.

The lower rates of CGT (/private-client-a-estate-planning/capital- Payment date is subject to ordinary corporation tax payment
gains-tax/2062-cgt-new-rates-and-residential-property-gains) (10% deadlines.
or 20%) introduced from April 2016 do not apply to the disposal of
If proceeds are to be extracted there will be a further charge to tax
residential property.
for the individual shareholder, see below.
CGT is payable by 31st January following the end of the tax year of
disposal.
From April 2013 gains from property that is subject to the ATED
There are proposals to introduce a 30-day from completion
regime (see below) will be subject to ATED capital gains tax,
payment deadline from 2019/20.
charged at 28%.
CGT hold-over relief may apply on disposal to the owners
company or disposal to a trust.
Private Residence Relief (PRR) and letting relief are available if
property sold has ever been only or main residence.
See CGT private residence relief (/land-a-property/899-privateresidences-and-tax-relief)
Tax on disposal of the property non UK resident
From 5 April 2015 a non-UK resident is subject to CGT when
disposing of an interest in UK residential property.
Only gains accruing since 5 April 2015 are taxable.
Gains are taxed at 18% or 28%: the lower rates introduced from
April 2016 do not apply.

Tax on disposal of the property non UK resident

From 5 April 2015 a non-UK resident company is subject to CGT
when disposing of an interest in UK residential property.
Only gains accruing since 5 April 2015 are taxable.
Gains are taxed at corporation tax rates.

Transactions must be reported to HMRC and a payment on

Transactions must be reported to HMRC and a payment on
account due must be made within 30 days. There are exceptions account due must be made within 30 days. There are exceptions
to the 30 day rule if there is no gain or loss, or if the individual is to the 30 day rule if there is no gain or loss.
already within self-assessment.
See CGT: non-residents and UK residential property (/overseasSee CGT: non-residents and UK residential property (/overseas- residence/1475-cgt-non-residents-and-uk-residential-property)
residence/1475-cgt-non-residents-and-uk-residential-property)
From April 2013 gains from property that is subject to the ATED
regime (see below) will be subject to ATED capital gains tax,
charged at 28%.
Non-resident companies are subject to CGT under two regimes:
where this is the case, ATED gains take precedence.
See ATED CGT: UK residential property & non-natural persons
(/land-a-property/925-cgt-uk-residential-property-a-non-naturalpersons)

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Extraction of funds

Buy-to-let ownership: personal or company?

N/a: all profits are available for the individual as fully taxed either
as rental income or CGT on disposal

Extraction of funds from the company

Profit extraction

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Income tax
Potential double tax charge when profits extracted as dividends by
higher rate taxpayer, or by basic rate taxpayer (from April 2016).
Owners can control dividend payment. Until 5 April 2015 any tax
charge avoided if a dividend is paid to a basic rate tax payer.
Changes to dividend taxation from 2016/17:
All individuals can receive 5,000 dividends tax free
regardless of other income
Three dividend tax bands: 7.5%, 32.5% and 38.1%
Tax credit abolished
Dividends received by pensions and ISAs are unaffected
See Dividend tax: 2016/17 (/directors/tax-efficient-remuneration
/1591-summer-budget-2015-dividend-tax)
Capital gains tax
Profits may be extracted as a capital distribution on striking off
(provided that assets less than 25k), or
Unlimited profits may be extracted as a capital distribution on
liquidation subject to transactions in securities rules.
Shareholders will expect to pay CGT at 10% or 20%
depending on whether basic rate or higher rate taxpayers.
CGT Entrepreneurs' Relief will not apply for a capital
distribution from a normal property rental business.
New rules for transactions in securities have been introduced by
Finance Act 2016 which took effect from 6 April 2016.
see Transactions in Securities (/directors/essential-know-how94289/481-transactions-in-securities)

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Ownership

Buy-to-let ownership: personal or company?

The maximum number of legal owners of land and property is

restricted to five.
There may be CGT on disposal of part interest to others.
Disposals are at market value, regardless of whether any
consideration received.
CGT holdover relief may be available.
Owners need to decide whether to hold property as joint tenants,
or tenants in common and also to consider the effect on joint
tenants of changing beneficial interests in the property.

Ownership

http://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-persona...

A company may have multiple shareholders.

CGT issues should be potentially avoidable if new shares are

subscribed for on incorporation.
Family shareholders should be aware of the Settlement
Anti-avoidance provisions if different share classes are allocated to
different family members.
See Income shifting and the Settlement Provisions (/directors
/tax-efficient-remuneration/119-splitting-your-income-to-save-tax)

See Joint Property: legal v beneficial ownership (/land-a-property

/692-joint-property-legal-v-beneficial-ownership)
Losses

Losses

There is no sideways loss relief for property losses. Losses may

be offset against other property income or carried forward.

Locked into the company and cannot be offset against the owner's
other income.

See Property profits and losses: adviser guide (/index.php

/tax-guides/248-property-profits-and-losses)

Losses can be offset against total company profits of the current or

future years, as long as the rental business continues.
See Losses (/companies/running-the-business/1894-corporationtax-trading-losses)

Annual Tax on Enveloped Dwellings (ATED)

Annual Tax on Enveloped Dwellings (ATED)

No exposure to ATED charge.

The ATED regime applies to high value residential properties held

by non-natural persons (e.g. a company) however there is an
exemption from the charge when the property is let on a
commercial basis.
The ATED charge is payable if the letting business ceases, for
example if the property is used by the company owners or their
families.
From April 2015 properties with a value of 1 million or more are
affected; from April 2016 this fell to 500,000.
See Annual Tax on Enveloped Dwellings (ATED) (/land-a-property
/924-annual-tax-on-enveloped-dwellings)

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Stamp Duty Land Tax (SDLT)

Buy-to-let ownership: personal or company?

Charged on purchase.

From April 2016 a 3% premium applies on the purchase of an

additional residential property (including a buy-to-let property or
second home).
See SDLT & residential property: higher rate (/land-a-property
/1867-autumn-statement-2015-sdlt-residential-property)

Stamp Duty Land Tax (SDLT)

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Charged on purchase from or gift by an individual to their

connected company. Charged on market value.

No SDLT where the property has been held via a partnership prior
to incorporation as the market value rule, above is overridden by
sch15 FA 2003. All property owning partners must become
shareholders.
From April 2016 a 3% premium applies on the purchase of
residential property by companies.

Land and Building Transaction Tax (LBTT)

From 1 April 2015 properties in Scotland are subject to LBTT
instead of SDLT.

See SDLT & residential property (/land-a-property/1867-autumnstatement-2015-sdlt-residential-property).

Stamp Duty also applies at a rate of 0.5% on share acquisitions of

A 3% additional dwelling supplement is charged on the purchase 1,000 or higher.
of additional residential property (including a buy-to-let property or
See Stamp Duty Land Tax rates and reliefs (/tax-guides
second home)
/409-stamp-duty-a-stamp-duty-land-tax)
See LBTT: Additional Dwelling Supplement (/scottish-tax/2042lbtt-additional-dwelling-supplement)
From 1 April 2015 properties in Scotland are subject to LBTT
instead of SDLT.
A similar 3% premium applies on the purchase of residential
property by companies.
See LBTT: Additional Dwelling Supplement (/scottish-tax/2042lbtt-additional-dwelling-supplement)

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Inheritance Tax (IHT)

Buy-to-let ownership: personal or company?

Inheritance Tax (IHT)
BPR relief is unlikely to apply in respect of the property.

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A property rental company is a business for corporation tax

purposes.
Property rental is regarded as a non-business activity.
IHT Business Property relief will not apply unless the company
has significant other non-investment activities.

Beneficiaries of the estate will receive the property at market value

so there would be no capital gains tax for them to pay on an
See IHT Business Property Relief (/private-client-a-estate-planning
immediate sale.
/1319-iht-business-property-relief-subscriber-guide)

On death a shareholder's shares will benefit from an uplift to

market value in the hands of the beneficiaries. Property held
in a company receive no similar uplift.
If the beneficiaries wish to realise their investment there will be
double taxation: the company will be subject to tax on disposal
of the property and the individual shareholders will be taxed
when extracting the proceeds (from April 2016: if in excess of
their 5,000 dividend allowance). The value of the shares is
likely to be less than an equivalent share of the property
because of the potential capital gains tax liability.
VAT

VAT

The general rule is that letting property is exempt from VAT.

Income from property letting is exempt from VAT with the

exception of commercial letting which is standard rated if the
company has opted to tax the building.

Residential lets are always exempt, however commercial letting

can be standard rated if the owner has opted to tax.

The letting of furnished holiday lets is a standard rated activity.

If the property qualifies as a furnished holiday let, then the income
generated is standard rated and the owner will have to charge
See VAT: Land and property at a glance (/vat/vat/1854-vat-landVAT if they are registered.
property)
See Furnished Holiday Letting (/land-a-property/95-furnishedholiday-letting) for more detail about generating income from
property as a furnished holiday let.

See Furnished Holiday Letting (/land-a-property/95-furnishedholiday-letting) for more detail about generating income from
property as a furnished holiday let.
Other considerations of running a company:
Some tax free benefits in capacity of employer subject to the
wholly and exclusively rule.
Will need to consider auto-enrolment if there are employees.

Overview
Corporate money box/alternative to pension
A property investment company is a tax efficient vehicle to use as a personal money box or as an alternative to a private pension pot, this is because:

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Corporation tax rates are decreasing and will be just 17% by 2020.
As the rate of corporation tax is much lower than the top rates of income tax, undrawn profits retained in the company grow more quickly compared to holding and being taxed in your own

name.
Retained
can bepersonal
investedor
in company?
the companys own name.
Buy-to-letprofits
ownership:
http://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-persona...
When the funds are required, for example, at retirement, you may be a non-taxpayer or basic rate taxpayer.
The amounts withdrawn can be planned and controlled to ensure maximum tax extraction efficiency.
Until 5 April 2016 basic rate tax payers paid no income tax on dividends
From 2016/17 changes to dividend tax affect profit extraction by company owners. These may be an advantage in some family investment companies:
A 5,000 dividend allowance.
There is no longer a tax credit: no grossing up is required.
Three dividend tax bands: 7.5%, 32.5% and 38.1%
Dividends received by pensions and ISAs are unaffected
See examples in Dividend tax: 2016/17 (/directors/tax-efficient-remuneration/1591-summer-budget-2015-dividend-tax)
Bringing in the family
A property investment company can also be used as a means to provide an income to other family members, in addition to providing an IHT planning structure. Some key advantages of this are:
You may give shares to family members: this may be done gradually, using CGT annual exemptions.
You can use the company to maximise efficiency by using multiple personal allowances and basic rate bands.
Changes to dividend taxation including the new 5,000 tax-free dividend band from April 2016 make it attractive to bring in family members as shareholders of investment companies.
You can provide for expenditure in a tax efficient way, for example school or university fees.
Family members can be encouraged to take an active part in the running of the company.
Control can gradually be passed down to children or grandchildren.
Gifts of shares to family members will be Potentially Exempt Transfers (assuming they are bona fide) and therefore could reduce your taxable estate for IHT purposes.
A property company may be used in conjunction with a discretionary trust in order to hold over substantial gains on property company shares.
Taking matters a step further, this can also be a very powerful way of sheltering assets from IHT:
You could set the shareholding up in a way which gives you control, but only a minimal legal interest, taking the bulk of the value out of your estate after seven years.
The assets that do not form part of your estate are not subject to probate: this can help to simplify matters for your executors.
You can retain decision making power and direct the investment strategy.
You can consider using the profits to make other investments, which are tax efficient in a company structure.
Some family investment company structures can become complex, and special attention is required in order to draft the company's Articles and to fully document and register any changes in
ownership.
See Family Investment companies (/private-client-a-estate-planning/income-losses-claims-reliefs/1628-alternatives-to-trusts-the-family-investment-company) for further planning points on
family companies.
For further general advantages of using a company see Sole Trader v Limited Company (/starting-in-business-77750/140-sole-trader-v-limited-company-key-tax-a-legal-differences.)
New property business
Choice of a suitable business structure from the outset is important as it is expensive to restructure any land and property based business due to, for example:
The high legal costs of transfer of property
SDLT or LBTT
Joint property owners may avoid SDLT if they trade via a LLP or established partnership, however not without significant compliance costs and other factors that should also be considered, e.g.
wills, elections, land registry.
See Property Profits and Losses (/index.php/tax-guides/248-property-profits-and-losses) and Joint Property (/index.php/land-a-property/692-joint-property-legal-v-beneficial-ownership#ata-glance) for further details.
Funding and using a company structure from the start, would avoid a second stamp duty charge and legal fees on a later transfer to a company without the need to use a LLP.

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Property Letting: CGT and IHT issues

These are covered more fully in our guide: Property Letting: CGT and IHT issues (/land-a-property/874-property-letting-cgt-and-iht-issues)

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Case study: single property

Buy-to-let ownership: personal or company?

http://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-persona...

Please note that this case study considered the pre April 2016 position of a landlord considering whether to incorporate his letting business.
This case study will no longer be relevant for letting businesses which were still unincorporated at 6 April 2016.
Mr Singh is a higher rate taxpayer with earned income in the region of 70,000 per year.
He owns a residential property worth 110,000 which he lets privately, net of other rental expenses (excluding finance costs) for 8,000 per year.
He also pays and currently receives tax relief on interest of 2,000 per year on his interest only mortgage.
His net profit from rental income for 2015/16 is 6,000.
Income tax
Current position: 2015/16
Unincorporated: Mr Singhs taxable rental profits are 6,000 each year, and as a higher rate taxpayer his tax liability is 2,400 (6,000 x 40%). His retained income is 3,600 per year.
Incorporated: his company would only pay 1,200 in tax (6,000 x 20%), retaining income of 4,800.
If company retained profits were paid out to Mr Singh as a dividend he would pay tax of 1,200 (25% of his net dividend of 4,800) leaving him with 3,600, the same amount as he has
now.
Outcome: he is better of incorporating if he does not wish to draw down all the company's retained profits each year.
Expected position in 2020/21
Corporation tax rates will fall to 19% on 1 April 2017 and to 17% by 2020.
By 2020/21 interest will no longer be a deductible cost for a higher rate taxpayer. See Restricting Mortgage Interest relief (/land-a-property/1694-restricting-mortgage-interest-relief).
Unincorporated: Mr Singhs taxable income will increase to 8,000 (his interest is no longer allowable). He will have a liability of 3,200 (8,000 @ 40%) and will be able to claim a tax reduction
(/land-a-property/1694-restricting-mortgage-interest-relief) of 400 (2,000 @ 20%) leaving tax to pay of 2,800. His retained income will fall to 3,200.
Incorporated: his rental business the position for the company will have improved. The company will pay tax of 1,080 (6,000 @ 18%) and retain income of 4,920.
If the company's retained profits are paid out to Mr Singh as a dividend, he will pay no tax on it at all as the amount is within the 5,000 tax free dividend allowance (/private-client-a-estateplanning/income-losses-claims-reliefs/1860-dividend-tax).
Outcome: incorporation saves Mr Singh 1,720.
Capital gains tax
The property was purchased for 60,000 including costs and if worth 110,000: there is an uncrystallised capital gain of 50,000 (110,000 - 60,000).
Sale in return for shares
Using incorporation relief (TCGA 1992 s162), Mr Singh can incorporate the property as a property business and hold over the gain. Assuming that he has used up his CGT annual exemption
elsewhere:
The company issues him with 110,000 of shares (say 110,000 shares of 1 each).
If he decides never to sell the shares or liquidate the company his held over gain is permanently deferred.
If he were to say sell or liquidate his company, he would then have a taxable gain of 50,000.
His shares have a CGT base cost of 60,000 (110,000 - 50,000 of gain held over).
The company receives the property at its market value of 110,000, and if it sells the property it will pay capital gains tax only on the increase in value over its 110,000 acquisition cost. The
company may then hold the cash from the sale and Mr Singh can continue to withdraw dividends, tax free up to his 5,000 dividend allowance.
Planning point: Mr Singh could also transfer the property to company for a combination of shares plus cash if he wished to also use his CGT annual allowance. A proportion of his gain will be not
by subject to s162 relief and he offsets his annual exempt allowance against gain.

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Sale in return for cash

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If Mr Singh chose to sell the property to the company for cash, at market value, he would either receive cash or he could leave the cash on a loan account. Assuming that he has a CGT annual

allowance.

Buy-to-let
ownership: personal or company?
http://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-persona...
He would pay capital gains tax on the gain of 50,000 less his CGT annual allowance. If the annual allowance is 11,100 he would pay tax at 28%, totalling 10,892, and would have created a
net loan account of 99,108 which he can draw with no further tax to pay, subject to cash being available in the company.
Planning if married
If Mr Singh is married, he could consider giving half of the property to his spouse. This transfer would be at nil-gain nil-loss for CGT purposes, and on a subsequent disposal to the company each
spouse would have an annual allowance available.
Stamp duty land tax position
SDLT is payable on the market value of property transferred to a connected limited company. As there is a lower limit in respect of property value of 125,000, Mr Singh would have no SDLT
liability on incorporation.
When the proposed 3% premium is introduced in April 2016 there would be a 3% charge of 3,300 for an incorporation in 2016/17. This cost represents a number of years' worth of
savings and may well make incorporation prohibitively expensive in future.
See notes above in respect of SDLT relief on incorporation of partnership property.
Inheritance tax position:
Property letting is not a business which qualifies for IHT Business Property Relief.
Mr Singh's inheritance tax position is not changed by holding the property through a limited company.
On death either the value of the shares plus any loan amount due to Mr Singh, or the value of the property if it remains in his own hands, will be subject to IHT in full.
An advantage of holding the letting property via a company is that he may gift shares in his company to his family, and so reducing the value of his estate over time.
Practical considerations:
Mr Singh will need to form a limited company.
The company should open a bank account in its own name to receive the rental income and pay expenses.
Permission from the mortgage lender is likely to be required in order to transfer the property to the company; if the mortgage deal needs to be renegotiated as a result this could mean additional
charges and a higher rate of interest payable.
He will need to arrange for refinancing by the company, this may be via a loan agreement with the company. The company will be required to deduct tax from any interest that it pays to him on
an annual basis.
If there are existing lease agreements they will need to be redrafted in the company name.
If tenants are not responsible for buildings insurance, then Mr Singh will need to arrange for this to be transferred into the company name, along with any utilities etc that he retains
responsibility for.
The company will need to prepare and file annual accounts and annual returns with Companies House.
The company will need to file annual accounts and a corporation tax return with HMRC.

Updates
What's new in this note?

20/09/16: updated following Royal Assent to Finance Act 2016.

19/05/16: included references and links to LBTT and a section on non-residents and capital gains tax. Also included references to ATED CGT. Noted that the case study example was relevant
to businesses considering incorporation prior to April 2016 changes.
05/05/16: changed links to SDLT guides, changed CT rates for 2020.
06/01/16: re-drafting the case study.
905/01/16:
of 10 re-drafting of the written section of this note.
14/10/16 00:59
11/12/15: update for condoc on Close company distributions and SDLT changes.
09/12/15: updated following Autumn Statement to include reference to 3% SDLT premium on buy-to-let property. Minor changes following the Finance (no 2) Act 2015 receiving royal assent.

16/10/15: new case study - see tab.

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