If you already have a property portfolio or are considering building one, should you do this in your name or within a company? Also, if you have a portfolio, is it worth transferring it into a company rather than holding it in your own name?
In recent years landlords up and down the country have been asking this very question. So why? The answer is Section 24.
What is Section 24?
Section 24 of the Finance Act 2015 came into effect as the name suggests in 2015. It basically restricts mortgage interest relief to basic rate i.e., 20%.
If you are a seasoned landlord, you will know that you could deduct all your mortgage interest (not capital) as you would your other rental expenses before the tax is calculated. But then things changed.
Since then, you could only deduct some of the interest as an expense and the rest as a relief. Roll forward a few years and now you only get a relief for the mortgage interest you have paid.
So what does this change mean?
Basically, what this means is if you are a higher rate taxpayer paying tax at 40% or 45%, your tax bill would have increased substantially because the relief is always only 20% of the mortgage interest.
These changes are making many landlords think twice about either continuing with their portfolios or entering the market.
And if you do decide to become a landlord, should you buy a property in your own name or a within a company?
What is the best option?
One of the main reasons for asking this question will be the annual tax liability. So, let’s look at what happens if you own your property personally.
- Personally owning the property
If you own your investment property personally, you report any profits in your own personal tax return. Once you deduct the expenses against your rental income you may well pay tax at the higher tax bracket of 40% or 45%, particularly if you have other income.
- Company owning the property
This way it means paying corporation tax on the profits, currently at 25% (but 19% if profits of £50K or less) which is obviously lower than paying income tax at 40% or 45%.
The profits will then be in the company however as a director / shareholder of the Company, you also have control of how and when you withdraw those funds. Payment of dividends is likely to be the cheapest way to get the profits out of the company and into your personal bank account.
Is it worthwhile transferring my property portfolio into a company?
The answer to this question is ‘it depends’. It really depends on how many properties you have in your portfolio.
When you transfer the legal ownership to a company, you are essentially selling that property. You will own the shares in the company which in turn owns the property.
If the property is mortgaged some lenders do not allow a property that you don’t own directly to be mortgaged.
If you do have properties mortgaged, it is likely, you’ll have to pay-off the original ‘personal’ mortgages and re-mortgage through a commercial mortgage scheme. Interest rates are also likely to be higher for these commercial loans.
If you own the properties outright, this isn’t an issue. If you are becoming a landlord for the first time than it will be easier but a bit more expensive to secure your loan as a commercial loan. We can help you with these decisions.
Are there any tax issues when transferring the property?
You may or may not know but when you sell an investment property there are tax consequences including reporting capital gains tax.
A capital gain is the difference between the current market value of the property less the cost of purchase and any improvements. If you’ve had the properties for a while, this may be significant.
The transfer of a property into your own company will be based on market value so you can’t step around this by selling the property to your company with a discount.
It may be possible for you to ‘defer’ the CGT payment. If you run your property portfolio “as a business”, as opposed to just another source of investment income, you may be able to receive incorporation relief
This is more likely to apply to a landlord with more than a few properties though. Incorporation relief allows you to defer the CGT payment until a later date when the shares you receive in return for the properties are sold.
Selling your property portfolio to your company also means your company will have to pay Stamp Duty.
Let’s say that you are selling a property valued at £350K. In this case you’ll need to pay around £18K in Stamp Duty (SDLT), as you’ll own more than one residential property.
If you have a number of such properties to transfer, you may be able to claim relief for multiple dwellings
The benefit in this is that rather than apply SDLT to each property transaction based on the price paid, the purchase of multiple properties is considered as a single transaction. So, SDLT is calculated based on the average price paid for each property. This could reduce the overall SDLT payable.
Moving a property portfolio into a company isn’t straightforward for many portfolio owning landlords, there’s a lot to consider and numbers to work through.
We would not recommend that you make any moves before talking to us. Call your normal manager here at Myers Clark first.