Does moving a Buy To Let (BTL) into a LTD Co save you money In 2023?

Since April 2016, the UK Government has cracked down on BTL landlords in the way of the taxes they pay. A major contributing factor was spiralling house prices, mainly in London, which lead to changes that saw landlords; pay an additional 3% per property via Stamp Duty and lose much tax relief, instead now having to pay tax on 100% of the rental income.

The overall outcome has been damaging to many landlords, and has resulted in many selling up. However, there is still a strong appetite for BTL’s amongst many landlords, and those who already own property now have one eye on moving their stock into a Ltd Co., due to the tax benefits they offer. But how true is that?

Benefits of holding a buy to let rental property in a Ltd Co include:

• Reduced tax liability at 25% corporation tax, compared to the 40% (or higher) paid by those who aren’t basic rate tax payers.

• You can still offset the interest from any mortgages before paying tax.

• Ability to offset ‘operational costs’ just like any other normal business.

• Inheritance tax benefits (as it is easier to leave properties to loved ones without losing 40% tax)

• Selling or transferring property all at once can be easier.

• Retaining profits within the LTD Co helps protect them from tax liabilities. If you sell one of the properties within, you aren’t making a “capital gain”. Instead, your business is making a profit. Holding within the company instead of drawing down protects against liabilities. This could help you use more of your earnings to expand your property portfolio faster.
  

All sounds perfect and an ideal solution to holding BTLs in your personal name, right? - Not quite.

Drawbacks of moving EXISTING BTLs into a LTD Co - there are huge additional costs associated:

• Moving a property from your name into a LTD Co will be treated as a purchase, and will therefore attract any stamp duty INCLUDING the additional 3%, even if it’s the first property to be held in the LTD Co. Yes, this is true. Despite already owning the property and you being the director of the LTD Co, the company is seen as its own entity, and all stamp duty is due as normal.

• Capital Gains Tax is payable. Obviously you have an annual allowance circa £12,500 (per person if jointly held), but could be a huge upfront cost in addition to stamp duty.

• Interest rates on LTD Co mortgage are higher, as are fees associated with arranging the mortgages (which the lender charges, not us - we are still free!).

• You need to produce annual accounts, meaning ongoing accountant fees.

• No capital gains tax allowances if you sell a property outside of the LTD Co.

• Solicitor fees are higher when purchasing.
  

Example (illustrative purposes only, not advice - speak to a tax adviser): moving a property worth £150,000 could cost:
£5,000 Stamp Duty + £3,500 CGT - capital gains tax (based on being bought for £125,000) + £2,760 additional interest of circa 0.5% (based on 75% of value = £112,500 = £46 extra per month, and over 5 yrs) + £500 extra solicitor fees + £1,000 Accountant fees
Total Cost of Transfer = £12,760

If you currently hold BTLs in your personal name and are thinking about moving to a LTD Co., we strongly suggest you really do speak to your accountant/tax adviser before looking into mortgages.

Moving a property across could prove incredibly costly, even if just once property as outlined above. For the above, you may be achieving a rent of £750 pcm, or £9,000 annually. The saving in tax of 21% would be £1,890, meaning it would take 7 years before you feel any benefit based on the figures above. Are you still going to own the property at this point? What is tax benefits change and this simply ends up costing you more overall? - These are all factors that need considering.

Now, like all things, there are ways to transfer without the Stamp Duty, and an accountant can explain further, but these routes can also take years, and any ‘loop hole’ could be closed at any point. Again, we strongly suggest talking to someone in a tax qualified position. At this point we are simply highlighting the potential pitfalls you need to consider.

If buying new property…. yes, placing into a LTD Co is likely to make sense. Again, check the tax savings vs additional accountant/legal costs etc. via your accountant/tax adviser, however it’s widely believed this will result in the most sensible route financially.

Summarising thoughts?
Yes, owning BTLs via a LTD Co is good for saving tax on any new property being bought, however if looking to move existing, it may be quite a few years before you see any benefit. If your plans are long term and you’re looking to leave to loved ones, it can be a very tax efficient method on both income generated, and inheritance tax liabilities.

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