Got a question about Incorporation? In this blog, we answer the top questions we received ahead of our recent webinar.
The topic of Incorporation is complex and can be challenging to fully understand if you’ve not gone through the process yourself. In our webinar, we gave our audience the chance to ask the experts their questions.
Here’s what landlords like you wanted to know, and what our experts had to say.
Is There a Tax Benefit to Incorporating Before Selling in 10 Years?
Absolutely, if done correctly. Incorporation relief allows landlords to transfer properties into a Limited Company without triggering Capital Gains Tax (CGT) on historic gains.
For example, if you bought a property for £100,000 and it’s now worth £250,000, that £150,000 gain is effectively deferred. The company acquires the property at today’s market value, so any future tax is only on gains from this point forward.
But here’s the catch: that gain doesn’t vanish. It attaches to the shares in the company, and if you sell those shares outside your family, the deferred tax comes back into play. Smart landlords are using inheritance planning or trusts to mitigate this (but speak to an expert before making any tax decisions).
Can I Use Company Funds Like a Pension?
Yes, and many landlords are doing just that. After selling properties within the company, some are using the proceeds to pay down mortgages or invest in low-risk assets. A married couple with no other income could extract up to £100,000 from the company and pay just 6.4% in tax. It’s a strategy that’s gaining traction among landlords looking for a simpler, more passive income stream in later life.
What If I Have a Poor Credit Score?
A poor credit score doesn’t necessarily mean you’re out of options. Some specialist lenders assess the full credit profile, not just the score, so minor issues, like a missed utility bill, for example, may not be deal-breakers.
However, missed mortgage payments, recent defaults, or unsatisfied CCJs are more serious and could limit your options. The key is transparency and working with a broker like us who understands the nuances of lender criteria.
Do I Have to Use My Home as Security for a Limited Company Mortgage?
No. Lenders typically secure the loan against the purchased property, not your home. However, most will require a personal guarantee (PG). This means that the directors may be personally liable if your lender needs to repossess the property, and the sale doesn’t cover the debt. It’s a safety net for the lender, especially when dealing with newly formed companies.
Why Do Lenders Insist on Personal Guarantees?
As mentioned, it’s more security for your lender. While the loan is made to the company, lenders are really assessing the people behind it. PGs ensure that directors are responsible for paying the mortgage, and lenders want to see that the individuals running the company have the means to repay the debt if things go wrong.
That’s why you can set up a Limited Company today and borrow through it tomorrow. The focus is on your personal financial background, not the company’s.
When Does the Deferred Capital Gains Tax Get Paid?
When you move your properties into a Limited Company using incorporation relief, the CGT you would have paid is simply delayed. That tax is now linked to the shares you receive in the company. The tax becomes due if you later sell those shares to someone outside your family.
However, many landlords avoid this by keeping the shares until they pass away (in which case the tax is no longer owed) or by passing the shares to family members or into a trust as part of their inheritance planning.
Got a question?
The questions raised in our webinar reflect a growing awareness and interest in Incorporation among buy to let landlords. With the right advice and expert support, you can have confidence in your property investment decisions and access the tax savings.
If you have questions about Limited Company mortgages, please speak to our expert team. They’ve helped many landlords incorporate portfolios.
If you have any tax-related questions, contact our expert partners at Comprehensive Tax Planning.
