On this article, I will look at utilising a limited company to purchase Buy to Let (BTL) Properties.
The first difference to understand is between a limited company which has a very wide area of authority to trade compared to a Special Purpose Vehicle (SPV) which has a very restricted remit.
An SPV is a limited company which is established by private individual(s) for the sole purpose of BTL activities i.e. the purchase/remortgage of residential properties for letting. The company must be incorporated with the following SIC codes. 68100 / 68209 / 68320 / 68201.
A Mortgage brokers view.
Some disadvantages of buying via a limited company / SPV compared to a personal BTL purchase:
- Higher interest rates
- Higher lenders arrangement fees
- Increased legal costs
Reduced choice of lenders (see below) This information correct as of 01/10/2015
- Paragon / Maximum advance 75% loan to value
- Aldermore / Maximum advance 80% loan to value / Trading & SPV
- Shawbrook / Maximum advance 75% loan to value / Trading & SPV
- Kent Reliance / Maximum advance 85% loan to value
- Fleet Mortgages / Maximum advance 80% loan to value
- InterBay Commercial / Maximum advance 85% loan to value / Trading & SPV
- Cambridge & Counties / Trading & SPV
- KeyStone / Trading & SPV
Ed Gooderham of Green & Co Chartered Accountants gives his tax view and answers common questions.
The advantage of buying via a limited company as compared to a personal purchase is the:
Tax position of the limited company status.
1. What is the tax treatment of rental income retained in property?
Company profits are liable to corporation tax, which is currently at a standard rate of 20%. Director shareholders will only be liable to personal tax if they extract taxable income from the business. They can choose to retain the profit in the company.
2. What is the tax treatment of income withdrawn from the company?
Income withdrawn from a company is typically done so as salary or dividends. Currently tax will only become due on dividends if you are a higher rate taxpayer. The effective tax rate on dividends which fall into higher rate is 25%, and for additional rate taxpayers the effective rate is 30.56%. The tax will calculated on the gross dividends.
From April 2016 however a £5,000 tax free dividend allowance will be introduced and then dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate). The tax be calculated on the net dividend received.
3. What is the position on Capital Gains Tax (CGT) on purchase and transfer?
Stamp Duty Land Tax (SDLT) will apply on purchases and transfers, and a transfer of a property into a company will trigger a capital gain. The market value will be used to calculate the SDLT and the capital gain on transfer.
An Annual Tax charge on Enveloped Dwellings (ATED) will be due on properties worth over £1,000,000 (ATED will apply to properties valued in excess of £500,000 from 1 April 2016).
4. Annual company tax return.
A company must submit a corporation tax return (CT600), declaring the tax due to HMRC, will be within 12 months after the company’s accounting year end. If applicable, the corporation tax payment date is 9 months and 1 day after each return period.
I recommend you contact Ed Gooderham to discuss the tax implications before buying via a Limited Company or SPV. Ed can be contacted at Green & Co Chartered Accountants.
ed@greenandco.com / 01633 833501 / www.greenandco.com
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- We are experts in SPV / Ltd Co lending.
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Neil Soundy Financial Services Ltd is an appointed representative of HL Partnership Ltd which is authorised and regulated by the Financial Services Authority.
The Financial Conduct Authority does not regulate some forms of buy-to-lets.
We do not give or imply legal or taxation advice. We recommend you contact a solicitor or accountant for advice in these areas.
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