LIMITED COMPANY VS PRIVATE OWNERSHIP – WHAT IS BEST?
Mainly due to changes in mortgage tax relief there has been a huge increase in applications for landlords setting up limited companies. Landlords have quickly seen the advantage of the tax benefits for limited companies. The number of buy-to-let mortgages issued to companies has likewise risen. However, exercise caution, speak to an accountant first before rushing into anything.
There are many pros and cons to weigh up first so we are going to look at some of the advantages and disadvantages of property ownership through a limited company versus holding the property in your own name. It is not straight forward and we recommend you always consult an Accountant to discuss putting together the most tax efficient strategy for buy-to-let. Here we will briefly discuss some of the benefits and how you can reduce your tax bill.
ADVANTAGES OF SETTING UP A LIMITED COMPANY
- Depending on individual circumstances this can be a great way to reduce your annual tax bill.
- Pay yourself and your spouse a salary reducing your tax bill.
- Offset more allowable costs against profits.
- Limited companies are exempt from the rule changes to Mortgage Interest Relief currently capped at 20% for private individuals.
- The possibility of claiming entrepreneurial relief when you wind-up the business.
- Separate legal entity and limited liability.
- The government is considering exempting companies with more than 15 properties from the 3 per cent stamp duty. Potential to form a joint company with other landlords to achieve the 15-property mark.
DISADVANTAGES OF SETTING UP A LIMITED COMPANY
- Harder to get a mortgage through a company.
- Additional accountancy fees.
- More paperwork, filings with HMRC and Companies House
- Moving the ownership of a property held in your own name to a company will require the company purchasing the property at market value (MV) and the private individual selling the property at MV. This could result in a personal tax bill for CGT if profit exceeds the annual CGT allowance of £12,300.
- Exiting the business could be a complex process.
PRIVATE INDIVIDUALS’ ADVANTAGES
- Easily transferrable between spouses to take advantage of potentially lower tax bands.
- Greater mortgage availability.
- Lower rate taxpayers still benefit for relief at 20%.
- Less paperwork and filings with HMRC & Companies House.
- Lower accountancy fees
- Exit strategy can be very straight forward
PRIVATE INDIVIDUALS’ DISADVANTAGES
- Reduces the profits of higher earners who had previously qualified for relief at 40 per cent.
- Fewer costs can be claimed by private individuals than through limited companies.
- Less opportunity to beat the extra stamp duty as future exemption rule changes may only apply to limited companies.
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