Buy-to-let: Another twist on company ownership

You’re considering getting into the buy-to-let market. You’ve read that because of changes to the rules in April 2016 it is now more tax efficient to buy the property through a company. Is this correct?

Landlords under attack

The Chancellor has made no secret of his intention to increase tax on profits and capital gains made by landlords in the buy-to-let market. However, not all the changes which affect individuals apply to companies. This has fuelled the long running debate over whether or not residential buy-to-let properties should in future be bought personally or through a company.

What are the changes?

Since 2015 three major changes have been announced which affect the taxation of residential rental properties:

1. The restriction of higher rate tax relief on loans and finance costs for individuals. This will be phased in from 6 April 2017. Companies aren’t affected.
2. A 3% stamp duty land tax (SDLT) (LBTT in Scotland) surcharge applies from March 2016 to purchases of residential property by companies and, if it is their second or subsequent residential property, to individuals.
3. Exclusion from the general reduction in capital gains tax (CGT) rates by 8% for gains made after 5 April 2016. This does not affect companies who are liable to corporation tax on gains.

Corporate advantage?

As you can see the changes don’t hit companies as hard as individuals. Companies also have another advantage over individuals. When they sell a property and make a gain they are entitled to reduce the amount liable to tax to take account of inflation. This is known as indexation. On the other hand, getting the rental profits and gains out of a company triggers personal tax liabilities which can significantly reduce the amount you actually end up with.

A guessing game

Personal or company ownership is a tax conundrum which experts have been arguing about for a long time. This is because there are so many factors involved, any one of which can sway the outcome one way or the other. To name just a few: (1) the rate of increase in property values; (2) inflation; (3) the rate of interest on money borrowed to buy the property; and (4) how much other income you have. In order to assess the consequences you’ll have to predict each of these factors and more for the whole period you expect to own the property.

A deciding factor?

Notwithstanding the above, one factor which might be a game changer is that since 6 April 2016 it’s been possible to extract property rental income and gains from a company at zero tax cost.

Tip: By extracting money from the company as dividends of £5,000 per year or less the tax cost will be zero. What’s more, if you’re buying a property with your spouse, unmarried partner or children (aged 18 plus), they too can share in the income and gains from the property rental company at zero tax cost. To help you assess the best method for owning a property we’ve set out an example showing the position for a typical buy-to-let owner.

The changes don’t automatically make company ownership a better option. However, a change in the general income tax rules from 6 April 2016 means that you and the other property owners can take up to £5,000 per year of income or gains tax free. This could tilt the balance in favour of company ownership.