Firstly, we all know there are many advantages to using a company for property investment.
The main driver has been the S24 Restriction of Mortgage Interest Tax Relief
2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayers its a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
Companies have many other advantages too:
- Stamp Duty on Shares is 0.5% so if you own each property in a separate company you can sell the shares rather than selling the property
- Holding properties in separate companies makes it easier for lender to take a charge over the business assets
- Companies are better for Inheritance Tax Planning enabling the company shares to be given away in stages
- Corporation tax is 19% and falling which means if you want to grow you portfolio you will retain more of the profit for re-investment
Those investors moving an existing portfolio will probably have to move all the properties to a single company in order to benefit from S162 Incorporation Tax Relief.
Let’s look at some of key points in more detail
Mortgages
At the moment company mortgages are probably 1% more expensive than individual Buy to Let Mortgages but that is is bound to change as more people switch to companies.
Lenders will probably want:
- A Charge over the Property – these are legal charges registered at Companies House
- A Debenture – these are charges over all the companies assets for example cash and rent arrears – this is fine if its one property per company but impossible if you have multiple properties and multiple lenders in a single company
- A Personal (Directors) Guarantee – where you have a group structure a Parent (Holding) Company guarantee will probably be a good option if you have to give a directors guarantee you can insure against the risk of it being called in for example http://www.pgicover.co.uk/
The mortgage is with the company, so if you want to sell an investment I think buyers will be interested in buying the company as it avoids re-financing costs.
Bank Charges
Banks will charge for each account and companies need their own bank account, but generally the cost is low, for example
https://www.lloydsbank.com/business/retail-business/rates-and-charges.asp
http://www.santander.co.uk/uk/business/current-accounts/business-current-account
Holding Company
The Holding Company can provide management services to the subsidiaries and also recharge shared costs.
It can lend money and get dividends from the subsidiaries (this would be Franked Investment Income so its not double taxed).
The Holding Company could employ staff.
Accountancy
We offer deals to make this structure costs effective, I am sure other accountants will too. The subsidiaries should be cheaper to operate than the holding company.
Tax Simplicity
In addition to Residential Investments and HMOs you might have Rent to Rent, Commercial, Development and Serviced Accommodation, keeping these in separate companies makes it easier to deal with Tax and Risks, for example some might be VAT registered where as others might be Exempt.
Stamp Duty
SDLT on Shares is 0.5% but its much higher for buyers who buy properties.
