Is Limited Company Incorporation right for me? Qualified tax expert Sean Hughes looks at the benefits and drawbacks of the process to help you make informed property investment decisions.
Sean Hughes, Comprehensive Tax Planning, returns to provide more insight on Limited Company Incorporation. The process can have serious consequences, so it’s essential to consider your options carefully before making any decisions.
Here, Sean discusses the pros and cons of Incorporation and what you must consider:
The Benefits of Limited Company Incorporation
Full deduction for mortgage interest payments
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- After a successful Incorporation process, you benefit from full deductions of mortgage interest payments. When properties are held personally, Section 24 means that relief is capped at 20% - resulting in increased tax liabilities for higher/additional rate taxpayers.
- After a successful Incorporation process, you benefit from full deductions of mortgage interest payments. When properties are held personally, Section 24 means that relief is capped at 20% - resulting in increased tax liabilities for higher/additional rate taxpayers.
Lower overall tax liabilities (for some!)
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- Limited Companies pay Corporation Tax, not Income Tax, meaning you may benefit from lower overall tax liabilities. However, this is not always the case. It is imperative that you “run the numbers” to assess what your tax liability will be if you continue to hold properties personally or via a Limited Company when extracting some/all of the profits from the Company.
- Limited Companies pay Corporation Tax, not Income Tax, meaning you may benefit from lower overall tax liabilities. However, this is not always the case. It is imperative that you “run the numbers” to assess what your tax liability will be if you continue to hold properties personally or via a Limited Company when extracting some/all of the profits from the Company.
Opens the door to further inheritance planning to reduce exposure to Inheritance Tax
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- As a landlord you are severely limited in what planning you can do to mitigate Inheritance Tax when you have mortgaged properties in your personal name. Limited Company Incorporation gives you many more options to help you plan for the future.
- As a landlord you are severely limited in what planning you can do to mitigate Inheritance Tax when you have mortgaged properties in your personal name. Limited Company Incorporation gives you many more options to help you plan for the future.
Reduced tax due on disposal of properties
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- Transferring properties to a Limited Company before sale to a third party can result in significant tax savings in some cases. The rationale is that Limited Companies only pay tax on any increase in the value of the properties while the company holds the property. As such, any historic gains in property values could be “effectively exempted”. Again, it is key that the landlords “run the numbers” to ensure tax savings are achieved based on their individual circumstances.
- Transferring properties to a Limited Company before sale to a third party can result in significant tax savings in some cases. The rationale is that Limited Companies only pay tax on any increase in the value of the properties while the company holds the property. As such, any historic gains in property values could be “effectively exempted”. Again, it is key that the landlords “run the numbers” to ensure tax savings are achieved based on their individual circumstances.
A portfolio ‘tidy-up’
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- Some landlords own properties in both their personal name and through their Limited Company. Incorporation can essentially ensure everything’s under one roof. A portfolio review is a great place to start here.
The Drawbacks of Limited Company Incorporation
It doesn’t guarantee tax savings for all landlords
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- As mentioned above, your individual circumstances will dictate whether Incorporation is the right option for you. If you are a basic rate taxpayer, even when not getting a full deduction for mortgage interest, it is unlikely that this process will generate substantial (or any) tax savings year-on-year.
- As mentioned above, your individual circumstances will dictate whether Incorporation is the right option for you. If you are a basic rate taxpayer, even when not getting a full deduction for mortgage interest, it is unlikely that this process will generate substantial (or any) tax savings year-on-year.
You may not meet the necessary criteria
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- If you don’t fit the criteria to Incorporate or it turns out not to be the right option for you, it can be costly to move to a Limited Company due to liability for Capital Gains Tax and Stamp Duty Land Tax.
- If you don’t fit the criteria to Incorporate or it turns out not to be the right option for you, it can be costly to move to a Limited Company due to liability for Capital Gains Tax and Stamp Duty Land Tax.
It may not be suitable for you depending on your portfolio plans
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- If you plan to sell up in a few years, a Limited Company might not result in substantial tax savings. However, if you want to leave these assets to your children/grandchildren, Incorporation is more likely to be a sensible option.
Next Steps
Our latest webinar, ‘BTL Incorporation & Landlord Tax: Your Questions Answered’, is now available to watch on demand! We brought together the experts to help you understand the Incorporation process and how it could boost your property portfolio.
Watch it back here: https://latest.mfbrokers.co.uk/p/7ROH-8LX/webinar-landlord-tax-and-incorporation
To find out what’s right for you, it’s essential to get in touch.
For information about Limited Company mortgage finance, please submit an enquiry here or call us on 0345 345 6788.
If you need professional tax advice, please contact our partners at Comprehensive Tax Planning.
