Buy to Let through a company or as an individual?
Many people are choosing to set up a limited company for buy to let properties instead of buying personally. Here we compare the cost and tax implications.
There are additional costs to set up and run a company. Using an online company formation agent to set up the company and provide the legal documentation can cost from £10 upwards. An annual Confirmation Statement to Companies House is required and can be done online. Using an Accountant to prepare the Companies annual accounts will generally cost between £100 and £500 more than for an individual.
When purchasing the property, the purchase costs for the individual are the same as for a company if the individual is buying a second home. If the individual does not already own a residential property they would not have to pay the additional Stamp Duty Land Tax (SDLT) of 3%. If their spouse or partner owns a property the additional stamp duty would be payable.
Costs of purchasing the residential property could include some or all of the following:
Stamp Duty Land Tax
SDLT rates at 1st Jan 2019
Property Individual Individual Company
Price 1st property 2nd property
Up to £125,000 0% 3% 3%
Next £125,000 2% 5% 5%
Next £675,000 5% 8% 8%
Next £575,000 10% 13% 13%
Above £1,500,000 12% 15% 15%
For a company all of these costs can be taken as expenses thereby reducing the profit of the company in the year of purchase and if a loss was made in the first year following year(s). An individual would treat these costs as part of the purchase cost and when the property is sold reducing the amount subject to Capital Gains Tax (CGT).
If the property needs work to bring it to a marketable condition most of these costs for a company can be capitalised and a proportion of this can be claimed each year. Currently this is 8% or 18% depending on the type of cost. An individual would treat most of these costs as part of the purchase cost and when the property is sold reduce the amount subject to Capital Gains Tax (CGT).
When renting the property, costs incurred for replacing or repairing existing items are allowable as an expense for the individual on a like for like basis; this means the replacement or repair must be the same quality as the item being replaced or the same standard when repaired. When the same quality or standard is not available because of improvements in technology or changes in the legal requirements of a repair the expense would be allowed if that installed was the equivalent of the old one. This can require a judgement to be made on the equivalency of items or repairs and evidence of the decision made should be kept. Some repairs or replacements may be used in the calculation of CGT when the property is sold. For a company generally repairs would be an expense. Whilst a replacement could be treated either as an expense or capital depending on the cost and/or policy of the company.
For an individual profit from the rental would be taxed at the top rate of income tax (rates above the personal allowance currently range from 20% to 45% 2018-19 tax year), if the property was jointly owned the profit would be split between the owners. The profit for a company would be taxed at the rate of Corporation Tax (currently 19% 2018-19 tax year). If the profit was then paid out by the company as dividend to the shareholders, tax would be charged at the rates for dividends (currently the first £2,000 is tax free, then rates range from 7.5% to 38.1%).
An additional annual tax for companies owning residential property valued at £500,000 or more is The Annual Tax on Enveloped Dwellings (ATED) (currently this ranges from £3,600 to £226,950 2018-19 tax year, this will be increased from April 2019).
When selling the property the individual would be subject to Capital Gains Tax (CGT) on the profit (currently the first £11,700 is tax free, then either 18% or 28% 2018-19 tax year. Please note these rates are higher for residential property than other capital gains). However, if you lived in the property for a time as your main residence Private Residence Relief and Lettings Relief may be available to reduce the amount subject to CGT. When a company sells a property Corporation Tax is payable (currently 19% 2018-19 tax year). For the shareholders to receive funds the company would pay out a dividend, tax would be charged at the rate for dividends (currently the first £2,000 is tax free, then rates range from 7.5% to 38.1%2018-19 tax year). The shareholders may be able to sell the shares in the company instead of selling the property, any profit would be subject to Capital Gains Tax (CGT) (currently the first £11,700 is tax free, then at the standard rates of either 10% or 20% 2018-19 tax year).
While we have made every effort to provide accurate and up to date information on our website, the law is constantly changing and affects each person or business in different ways. We will not accept liability if you rely solely on this information, professional advice should always be obtained before making a financial decision.