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New tax law changes - Owning property in your own name V's a Ltd Company

Started by Dreamchaser, December 17, 2015, 01:51:32 PM

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Dreamchaser

Hi All,

I'm new to this forum and would like some advise. I currently have 2 buy to lets under my belt and given the recent tax changes due to affect the BTL investors, I wanted to know if I'm better off keeping these under my own name or transferring (selling) them to a Ltd company (that I would have to create)? All in an attempt to save on the tax bill. Also worth considering that I plan on increasing my portfolio over the coming years.

Any feedback would be great!

Thanks.

Harvi

Hippogriff


Dreamchaser

The following was taken from the telegraph

George Osborne unveiled a shock tax change in 2015 which will remove landlords' ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, the Chancellor wants to tax landlords on their turnover rather than profit, meaning that tax will be payable on nonexistent income. For some, tax rates will exceed 100pc: landlords will have to pay all of their profit in tax, and then pay more tax still. The tax increase will be phased in from 2017 and fully implemented by 2020.

...Findings: Smith & Williamson has calculated that any higher-rate taxpayer landlord whose mortgage interest is 75pc or more of their rental income, net of other expenses, will see all of their returns wiped out by 2020. So mortgage costs above 75pc of rental income will mean the buy‑to‑let investments become loss-making. For additional-rate (45pc) taxpayers, the threshold at which their investment returns are wiped out by the tax is when mortgage costs reach 68pc of rental income.


http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11966662/Buy-to-let-calculator-how-will-new-tax-reduce-your-profit.html

theangrylandlord

Please be careful of advice received from websites (including my own) and always do your own research.
Obviously I cannot understand your full situation from a small blog....

Could write loads on this but will limit to the basic issues (as you already own the two properties)

Issue 1. Tax (?!)
Any transfer from you to the company will most likely be a disposal for capital gains tax purposes, so taxable.
There will be a potential stamp duty charge for any properties worth more than £125,000.
This would probably make the exercise prohibitively expensive.

you'd be better off retaining existing properties personally and buying any future properties via a company. For this reason however....

Issue 2. Debt
Increasingly bank are not willing to lend to limited companies so your ability to get a mortgage might be limited (hah! pun intended) ...certainly uncompetitive.  So you need to take the effect of the "higher" cost against the savings in tax.

Issue 3. Other taxes
It's not clear this is a slam dunk to set up a company  corporation tax is 20% for both income and capital gain but then marginal income tax is based on the 0%, 20%....45% bands ..so what's your marginal rate of tax? 
Also capital gains tax could be 18% vs corporation tax of 20%.
You then have have restrictions on when to take money out and and dividend tax will likely apply
I would suggest look at issues 1 and 2 and 3 then build a spreadsheet to figure out if the next property you buy should be in a company....

Can provide more details later but for now I think you are at exploratory stage.  Don't forget the new tax impact is phased in and if you are a 20% tax payer then you MAY not be affected ....

Unfortunately without a bucket load more information it will be practically impossible to provide any semblance of directional advice but general (and I do mean general) rule of thumb....if you own properties already then likely keep them in your own name, if you want to buy then consider incorporation....but I think in this case you might need an accountant to help you out as you will need to provide all your financial info e.g. Income

Best of luck

Angel_Commercial_Finance

Butting in here... The tax issue might be only one problem. If you have a mortgage, it can also be tricky, but not impossible.  The transaction will have to be at full market value (as HMRC will be unimpressed if CGT is underpaid and there are also bankruptcy law implications) and if there is a mortgage involved, many lenders will treat the transaction as if it is at arms' length, and require the transferor to pay a deposit when contracts are exchanged.

If an asset is to be moved from individual to a company, even if you are the sole owner of the asset and sole director of the company then as two separate legal assets the property cannot be refinanced into the company name, the property title has to be transferred by a conveyance into the new company's name at HM Land Registry.  At this point many landlords, and some accountants work on the assumption that the asset can be transferred across (if owned outright) for a nil value or consideration or if there is a mortgage debt, bought into the company by taking out (for example) a £75,000 mortgage in the company name to repay a £75,000 debt in the individual name.  This is a "transfer" for the debt level only and this cannot be done!

Any asset transferred for nil value or under-market value effectively becomes a "pariah" to lenders and cannot be borrowed on for many years thereafter. Any asset that is sold must be sold for its full market value, because under bankruptcy law it might be treated as a "fraudulent preference" (that enables a court to rewind any under market value transaction to benefit a bankrupt's creditors at a later stage). No lender will make a loan available on that property. Would you loan on a property that could effectively be taken away from you to repay a wholly unrelated debt 2 years down the line? The limited company has to purchase for the full market value and unfortunately have to pay stamp if its within stamp duty threshold but this is not the main problem if there is an existing mortgage.

When purchasing the asset into a limited company then the full purchase price must be sat at the solicitors. Taking the above example - John Smith Limited buys the property from Mr John Smith for £100,000, who has a mortgage in his own name on the property for £75,000. He may use a lender to raise £75,000 towards the purchase price but then he needs to have a further £25,000 sat in cash at the solicitors to complete the property transaction. The lender won't complete on the purchase unless the solicitor informs the lender they are in funds for the full purchase price.

Accountants and some solicitors assume that the purchase can occur without this money lodged and in some instances it can (say for example John Smith had a £25k directors loan lodged in John Smith Limited that was to be repaid during the transaction) but in most instances it cannot.  We therefore have a huge market of individuals that don't have the liquid assets to transfer the asset into a company name.

However, there are some lenders willing to treat the situation "as if" the deposit had been paid. This is in effect a gifted transaction for the full balance of funds needed and a type of transaction that has been extremely difficult to perform since the recession.


theangrylandlord


Angel_Commercial_Finance

You're welcome.   :)

I'm here to learn also and the quality of replies around here is often very good indeed.

Dreamchaser

AngryLandlord,

Thanks very much for you reply, esp based on the limited info I presented. Appreciate I would need to seek professional advise (this is just me exploring different views).

I am currently a 20% tax payer and both of my properties are realistically valued below £125K, so they should be exempt from stamp duty. Having said that I will probably end up in the higher tax bracket soon enough once I get a few more rental properties under my belt.

Speaking to a finanacial advisor earlier today he mentioned 'loosely speaking' currently there are roughly 30 different lenders open for B2L mortgages for sole traders, however there only about half a dozen available to Ltd companies. (he was not my mortgage advisor so I'm not sure how true this is). Also very little choice available, and as you say the rates will be higher too.

I have been leaning towards purchasing new properties in a Ltd company, but there no rush to set this up just yet. I think it would be best to wait and see if the proposals regarding the tax changes are approved as is yet to be challenged under the judicial review.

I think I'll need to sit down with my accountant to fully appreciate if the Ltd company will be a better approach based on my circumstances.


Thanks.


@Angel_Commercial_Finance,

Thanks for your input. That is very interesting.

...the example you gave about John Smiths Ltd is useful to know. So if John Smith Ltd borrowed 25K from John Smith and raised the remaining 75K using mortgage under John Smith's Ltd, he could transfer the property this way. Once the funds have been released and the property transferred then loan of 25K could be repaid back to John Smith. Appreciate this transaction would be subject to capital gains tax.

The transaction would be at the market value, confirmed using a qualified RICS surveyor. Which ever approach I take I will make sure I seek specialist advice from both accountant and financial adviser. Everything must be above board, as the last thing I would want is for lenders to refuse to lend on it.

Again, thanks both on you input!   :)


JIMANIC

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