Buy-to-let tax guide: Should you set up a company?

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Should you join the rush of moving your existing rental property to a company?

There is one loophole in the new Section 24 tax rule on buy-to-let mortgage interest: it only applies to individuals. Companies can still deduct interest from profits as before – for now. No wonder the number of buy-to-let mortgages issued to companies doubled after the change was announced. So, should you join the rush and move your existing rental property to a company?

To do this, you’d have to ‘sell’ your property to your new company at market rate. This means you would have to not only pay capital gains tax on any increase in the property’s value, but your company would then have to cough up the 3% higher stamp duty rate on second homes. Ouch.

Is it worth buying new properties through a company? Not if you’re a basic-rate taxpayer, except perhaps in borderline cases. Even for higher-rate payers it would likely only make sense if you’re planning to leave returns to build up in the company, such as for a pension pot or to fund your next property. Otherwise it could end up costing you more.

But, as with most things tax, there is no blanket answer. Here’s what to consider:

  • As a company, you’ll pay corporation tax rather than income tax on your profit – so higher-rate taxpayers will more than halve their tax bill from 2017
  • If you extract your rental profits, you have to do so as dividends. If these are more than £5,000, you’ll be taxed a second time on this, which could leave you worse off
  • Companies have no capital gains tax allowance, so you pay more when you sell
  • Borrowing costs for companies are around 0.7% higher
  • There are extra costs and hassle to file annual company accounts.

The right answer for you depends on what you earn, how much you’re borrowing, how you want to use the rental profit, if you want to sell and a myriad other factors.

Do take expert advice.

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