Should I incorporate my buy-to-let business?
Emma Rawson, technical officer with the Association of Taxation Technicians, looks at the pros and cons of incorporation
Emma Rawson, technical officer with the Association of Taxation Technicians, looks at the pros and cons of incorporation
On 6 April 2017 there was a major change to the income tax rules for landlords. Instead of interest and other costs on loans taken out to purchase residential property being deductible from rental income, tax relief will now be restricted to basic rate only, with the changes phased in over four years. Individual circumstances can mean that the restriction produces eye-wateringly high effective tax rates.
This restriction does not apply to companies, prompting many landlords to wonder whether it might be better to incorporate their property business.
As with most things in tax, there is no straightforward answer to this question. As highlighted during lively debate at recent ATT conferences, there are a number of different issues which need to be considered.
Will there be any tax to pay on incorporation?
The answer to this is often yes. If existing residential properties are transferred into a company:
It is therefore important to look closely at the property portfolio before deciding whether to incorporate – it may be that the tax charges arising on transferring properties into the company cancel out any potential advantages.
If this is the case, then it may be worth considering making future property purchases through a company, but keeping existing properties in personal ownership.
What are the tax implications of operating through a company?
Although the new mortgage interest restrictions do not apply to companies, and corporation tax rates are lower than income tax rates, the following need to be considered:
The level of any tax savings will largely depend on the level of income the individual needs to draw from their business – the additional income tax payable on large dividends may cancel out any other savings. If on the other hand profits can be retained in the business, then operating as a company might be more efficient.
What about exit plans?
One key point not to be overlooked is the long term plan for the property business, especially any future exit:
Are there practical issues that need to be considered?
As well as looking at tax implications, it is important to consider wider legal implications (outside the scope of this article). The practical implications of incorporation also require attention, including:
Conclusion
Overall, the pros and cons of incorporation have to be considered on a case by case basis – there is no one size fits all answer.
When making this decision, it is important that landlords and advisers do not focus on a single issue, but look at the bigger picture including (but not limited to) the areas highlighted above. What is the best answer will often depend on the facts and circumstances of the individual landlord including their personal tax position, age and health, the make-up of their portfolio and their long term investment aims.
Read our guide to the UK corporate tax system.
Emma Rawson is a technical officer with the Association of Taxation Technicians