Founding Partner, Investment StrategistAlfred is a global investment specialist with more than 20 years’ experience. Having started his career as a trader, Alfred has spent years learning the intricacies of the various markets including stocks, bonds, commodities, consumer financial products, property, and more.
There is nothing that can be done about the higher stamp duty. However, a limited company does make it possible to avoid higher taxation due to the differences in how individual and corporate taxes are assessed. By setting up a limited company that you own and direct, and then selling your portfolio to that company, you will reduce your own personal income tax by getting your mortgages out of your own name.
Keeping Things As-Is
To illustrate the benefits of establishing a limited company, let us first talk about what would happen if you left everything as-is. Assume you have a small portfolio of just four or five houses whose titles all exist your name. Beginning in 2017, you will only be able to claim a certain amount of interest you pay on your mortgages. By 2020, you will only be able to claim 20% of your interest mortgage. That means for every £1,000 you pay in mortgage interest, only £250 can be claimed for tax relief.
As for the remaining £750, it is a double-edged sword. Not only can you not claim it for tax relief, but the amount of rental income you receive to cover the interest will also be considered taxable income. Combining the two could raise your tax bill significantly.
So what would happen if you set up a limited company? Keep reading to find out.
Limited Company Taxation
A limited company does not pay income taxes in the same way. Any earnings from your portfolio are treated as capital gains currently subject to a 20% rate. That rate is being reduced to 18% between now and 2020. Because a limited company now owns your property, interest can be claimed as a business expense against taxes.
As the owner of the limited company, you would draw a salary that would then be subject only to standard income tax. All of the mortgages would be held in the name of a limited company as well.
Know the Upfront Costs
Establishing a limited company to buy your property portfolio may be a good choice in your case. But it's not right for everyone as there could be some steep upfront costs involved. For example, all of your mortgages will have to be transferred to the limited company which, ultimately, could result in early repayment penalties and other charges.
You will also have to pay additional stamp duty on each sales transaction. Depending on how many properties you own and their selling prices, this could be pretty significant. Along those same lines is capital gains.
If your properties are now worth more than you purchased them for, you must either sell them to the limited company at a loss or pay capital gains on the profits. Most investors will choose the latter option in order to satisfy bank requirements for transferring mortgages.
There is a way to get around the higher taxation of buy-to-let properties if you are willing to absorb the upfront costs. In the long run, the amount of money you save in taxes could make establishing a limited company the best thing you could do for keeping and maintaining your buy-to-let portfolio.