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  • Writer's pictureNaresh Sethi

Should Buy-to-Let Landlords Incorporate?

Generally companies have a higher administration burden and compliance requirements and hence also higher costs.

With dividend tax free limit on dividends being reduced to £5000 (£2000 from 2018) the tax advantages on incorporation are not so great.

Buy-to-let landlords are now having tax relief on mortgages or loans restricted to 20% (instead of relief at higher tax rates in previous years) but one must remember that the relief for companies is only 19% (the corporation tax rate relevant) so there is not so much benefit in incorporating.

When one transfers a property to a limited company it will be at market value of the property at the time of transfer and there will most likely be capital gains tax to be paid - as well as additional costs and possibly stamp duty.

Though corporation tax is lower the shareholders/ owners of he company will be taxed when they withdraw funds from their company (whether it is by salary or dividends); individual circumstances will vary.

On selling a property individuals are entitled to capital gains tax allowances of £11,300 each (2017-18); these are not available to companies (companies can claim indexation allowance instead). Also selling a property via a company may mean the shareholders end up paying two sets of taxes - capital gains tax (or corporation tax if outside ATED) and when money is extracted from the company. There are alternative routes available like selling the shares in the company or liquidating where lower capital gains tax is payable at 10 or 20 % (using investors relief) instead of 18 or 28%. However there are anti-avoidance rules associated to liquidations. Entrepreneurs relief is not available as it is regarded as an investment company and not a trading business.

There is greater tax advantage in incorporating if funds are retained in the company for growth rather than extracted. One advantage of incorporating is limited liability but this is reduced as lenders may require personal guarantees; another advantage can be the possibilities of structuring for inheritance tax planning.

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