Read This Before Setting Up a Limited Company for Your Property Portfolio

Rearranging your property portfolio into a limited company is a decision many investors consider, primarily for tax reasons.

However, because such a decision depends on your personal circumstances and as new property tax laws are being implemented in 2017, it’s recommended you seek the advice of a professional accountant before making such a move.

Tax Changes

From April 2017, the government will introduce changes to help diminish the dominance of landlords in the UK buy-to-let sector.

The current system allows multiple property owners to claim tax relief on all mortgage interest payments when working out their profits. However, under the changes proposed by former Chancellor George Osborne, mortgage interest tax relief will now be cut back from a possible 45% down to 20% by 2020.

Tax changes are coming that will affect property investors who are not part of a limited company.

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Those affected most by these new regulations will be higher-rate taxpayers whose mortgage interest is at least 75% of rental income. In addition, basic-rate taxpayers could now find themselves pushed into a higher tax band because of the new changes.

However, one saving grace for landlords is that limited companies are exempt from the incoming mortgage amendments. That’s why many property owners are restructuring their status to become a corporation.

Setting up a Limited Company

Despite the initial attraction to become a limited company, there are various pitfalls to avoid before doing so. They’re only beneficial for certain types of investors, whilst long-term ramifications and the availability of mortgage finance could also affect the decision.

To begin with, transferring the status of a property from private ownership to a limited company is classified as a sale – from April 2019, this will result in a capital gains tax bill on any profits, as well as a stamp duty charge of 3% for properties worth over £125,000.

In addition, obtaining a future mortgage could be trickier as some lenders restrict their options to companies as opposed to individuals. However, setting up a special purpose company that only contains a property portfolio is looked upon much more favourably.

There are pros and cons to setting up a limited company.

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Advantages of Becoming a Limited Company

As well as the increased tax relief for becoming a limited company, there’s also no income tax to pay on profit as your portfolio grows. Despite having to now dish out corporation tax – which itself will decrease to 18% by 2020 – this is still substantially lower than the higher income tax rate of 40%.

Another positive aspect to consider is that funds can still be withdrawn from the company and used as personal finance under a Director’s Loan.

Professional Advice

In many cases, setting up a limited company will result in some fantastic tax advantages for your property portfolio but can also bring its own drawbacks. For example, there’s the hassle of preparing new bank accounts, registering with Companies House and the HMRC, along with further tax calculations to work out.

It's best to seek legal advice before setting up your company.

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Because of this, it is often advisable to employ legal advice so you become as tax efficient as possible and negate costly mistakes.

If you’re worrying about your property investments, take a look at our article on why there’s no prospect of a housing market crash.