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The benefits of limited companies for buy-to-let landlords

 

Buying a rental property through a limited company has become the norm for a great many landlord investors according to research that underscores the effect of tax changes aimed at reigning in the buy-to-let market.

 

Over 70% of buy-to-let applications for purchases were made through limited companies rather than by individuals in the first nine months of 2017 up from some 45% in 2016. However, the growth in the number of households renting has slowed to 2.2% during 2017 compared to a high of 8% in 2014.

 

The confidence of landlords has been hit by the loss of higher-rate tax relief on mortgage interest, rising costs and tightened criteria. It seems that this cocktail of tax reform and more stringent regulation for landlords has slowed the growth of the private rented sector.

 

However, owning a property through a limited company does allow a landlord to continue to claim tax relief on mortgage interest for the time being.

 

The benefit of the use of a limited company to acquire a property for a portfolio also extends to the sale of that same property if the company which owns the property is sold instead of the title to the property itself.

 

The reason for this is quite simple. Stamp Duty Land Tax rates are lower for the sale of shares in a company than they are for a routine purchase. For example, a buyer who acquires all of the shares in a company that owns a property worth £1,000,000.00 will pay stamp duty at a rate of 0.5% on the value of the consideration paid for the shares. In our example this means Stamp Duty amounting to £5000.00. Alternatively, a buyer of a property for a value of £1,000,000.00 will pay Stamp Duty Land Tax in the sum of £43,740.00. No SDLT is payable on the first £125,000.00, 2% on £125,000.00 to £250,000.00, 5% on £250,000.00 to £925,000.00 and 10% above £925,000.00. The comparable saving is very sizeable and consequently means that a sale property owned by a company can be a more marketable and tax efficient proposition for both buyer and seller.

 

Caution is advised when considering a purchase of the shares in the company that owns the property. When shares are acquired the company is acquired “warts and all”. Prudent, detailed due diligence should be undertaken to ensure that the buyer is aware of any potential skeletons in the closet.  Such due diligence will be wider in scope than a routine property purchase because of the implications involved in acquiring a company but provided these steps can be navigated carefully and successfully it is clear then that limited company status can provide very real benefits and advantages to both sellers and buyers alike in an increasingly challenging market place.

 

Admittedly, complicated matters can be like peeling an onion – you have to peel back one layer at a time. However, unlike peeling onions, this doesn’t mean that more complicated matters will bring on tears!

 

Andrew Morgan is Head of Company and Commercial at JPC Law.

Please contact him for more information on this or any other Corporate or Commercial matter.

E: amorgan@jpclaw.co.uk

T: 020 7644 7290

General Enquiries:

E: enquiries@jpclaw.co.uk 

T: 020 7625 4424 

 

 

 

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