Episode Details

As accountants and tax advisers, we are often asked the benefits of holding residential rental properties through a limited company. Whilst there are benefits of holding residential rental properties in a corporate structure, the downsides need to be given equal airtime. In this article, we explore some of the advantages and disadvantages of holding residential rental properties in a limited company.

The reason many clients ask for this guidance is because from 6 April 2017, HMRC restricted loan interest relief available for residential landlords holding property personally. These restrictions have not been extended to properties owned via a limited company hence making the corporate route appear attractive.

The restrictions have been phased in over a period of four years, meaning the allowable loan interest between 2017/18 and 2020/21 has been reduced as follows:

• 2017/18 – allowable loan interest – 75%
• 2018/19 – allowable loan interest – 50%
• 2019/20 – allowable loan interest – 25%
• 2020/21 – allowable loan interest – 0%

The element of interest disallowed in these years and, going forward on 100% of the loan interest, will no longer be a direct deduction from the rental profits. However, a tax credit of 20% will be given on the mortgage interest payments. For example, if you have incurred mortgage interest of £10,000 you will receive an allowable deduction of £2,000 from your overall tax liability.

Questions to ask before transferring to a limited company

Each individual’s tax position is different and the therefore a ‘one size fits all approach’ is not best practice. When we are asked to provide guidance on whether to hold properties through a company, we tend to ask the following questions:

• What is your current tax position?
  • Are you a basic rate or higher rate taxpayer?
  
  
• Does a lower earning spouse jointly own the property?
  • If not, should tax planning to equalize assets between spouses be explored first?
  
  
• Is the income required for personal expenditure?
  • If the income is required and is held within a company, the tax efficiency would be diluted.
  
  
• Is the property mortgaged?
  • If not, a company structure is unlikely to be worth it.
  
  
• Does the property currently stand at capital gain and what is the current value?
  • Capital gains tax and stamp duty land tax may become payable as a result of the transfer.
  
  
• What are the future plans for the properties if transferred to a company?
  • There are likely to be issues if the property held in a company is ear marked to be a future main residence.
  
  

Any decision to hold residential rental property through a limited company needs to discussed with a suitable qualified professional as transactions do have some unintended consequences.

The main advantages

• Interest relief is available to set against rental profits.
• The corporation tax rate is currently 19% compared to 20%, 40% or 45% if held in personal names.
• Timing of company dividends for tax efficiency.
• Family members can be involved, reducing the tax burden.
• Tax efficient if funds are left within the company.

The main disadvantages

• Potential higher borrowing cost and personal guarantees may be required.
• Potential stamp duty and capital gains tax liabilities for transferring to a limited company.
• Increased accountancy fees.
• If an individual needs the rental income for personal expenditure the majority of the tax efficiencies will be lost.
• Annual Tax on Enveloped Dwellings (ATED) - ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

An ATED return