We’re receiving more and more questions from our clients about the wisdom of incorporating buy-to-let businesses instead of holding properties personally.

This is a tricky area and, to be honest, while this article gives you a great overview of the situation, we would urge you to get in touch with us before making any decisions so we can role-play and stress-test different scenarios for your personal circumstances.

So, why the surge in enquiries?

Incorporating buy-to-let businesses – changes in personal taxation

The government have performed a real volte-face over the buy-to-let sector. After two decades of stoking and encouragement by governments of different hues, the wheel has firmly turned against the sector.

Whenever you buy a home which is not your primary residential property now, you’re hit with an additional 3% stamp duty charge which adds around £7,000 in tax to the purchase of a property priced at the UK national average.

Mortgage interest is now no longer deductible before declaring profits, it’s after. The automatic 10% wear and tear allowance has gone. And from April 2019, you’ll have to pay capital gains tax on non-primary residence property disposals within 30 days instead of waiting until the next Self Assessment as under the current system.

So, compared with a few year ago, it now costs significantly more in taxes to build a property portfolio and new taxation rules mean you’ll make a lot less.

Incorporating buy-to-let businesses – how is it different for limited companies?

There are some definite advantages.

Whereas you may have to pay up to 45% on your profits if you hold properties personally, corporation tax at 19% applies if properties are held within a limited company.

You can choose to receive income from your limited company as dividends for which you get a £5,000 personal allowance (reducing to £2,000 from 2018/2019). Dividends received by any pensions or ISAs you hold are unaffected.

For inheritance tax purposes, if the business holds a significant amount of property, the market value of the shares you own in the company may increase when you die. If you hold a significant value of property personally, you will be almost certainly not allowed to claim the houses under Business Property Relief rules meaning a potentially very large tax bill for the beneficiaries of your will.

Incorporating buy-to-let businesses – the disadvantages

First off, capital gains tax and stamp duty land tax.

If you incorporate your buy-to-let properties, in HMRC’s mind, two things happen. You sell the houses and your company buys the houses.

When you sell the houses, you will be liable to pay 18% of your profits if you’re a basic rate tax payer in capital gains, rising to 28% for higher and additional tax payers (after your annual tax exemption).

When your company buys the houses, it will have to pay the enhanced stamp duty rate.

The act of transferring the houses may result in joint tax bills to you and your company running into tens of thousands or hundreds of thousands of pounds. You may need significant personal savings to achieve the incorporation.

If you hold any high-value properties of more than £500,000, you will have to pay an annual charge on ownership in addition to the domestic rates you pay when the house is unoccupied. For house between £500,001 and £1,000,000, the charge is £3,500, jumping to £23,550 for homes worth between £2m and £5m. If your limited company was lucky enough to own a property worth £20m or more, the tax would be £220,350.

This tax is called the Annual Tax on Enveloped Dwellings – click here to read more on HMRC’s website. Property held personally is not affected by this tax.

Incorporating buy-to-let businesses – talk to Burton Beavan

We hope you can see from this article what a tough decision it is to incorporate an existing personally-held buy-to-let property portfolio. Please, before you make any decision on this, call us on 01606 333 900 or email us at hello@burtonbeavan.co.uk to run through the options.