‘Can I lease my buy-to-let properties to a limited company I own at rents which cover my mortgage interest payments, in order for that company to let them out to tenants at full market rents and thereby pay corporation tax on the profits at 20%, rather than income tax at 40%? I will not be taking any salary or dividend from the company.’
The idea looks attractive, but there may be a problem.
The implication of the question is that a market rent for the properties will be significantly higher than just the mortgage interest. This in turn means that you could be vulnerable to a challenge from HMRC on the grounds that because you are not letting property at a commercial rent, it cannot be considered to be part of your UK property business and so you cannot deduct any expenses from the rental income.
Normally, as an informal concession, HMRC will allow expenses sufficient to cover the rental income, but will dispute any claimed loss. This applies in cases where, for example, the property is let to a relative or friend, but I see no reason why it should not be extended to your proposed structure.
However, you will be relying on HMRC applying their concessionary treatment, which I would have thought would be a rather uncomfortable position to be in.
Company ownership
As an alternative, you could consider transferring the properties into the company. Depending on how many properties are involved, and how organised your property business is, you might be able to transfer the properties to the company in exchange for an issue of shares. Section 162 of the Taxation of Chargeable Gains Act 1992 states that where the only consideration for the transfer of ‘a business’ to a company is an issue of shares, then the capital gain that would otherwise arise on your deemed disposal of the properties is rolled over into the value of the shares issued, and the company acquires the property at its current market value.
The result is that the shares have only a nominal base cost for CGT, but there is an uplift to current market value for the properties.
There are, of course, some problems:
- Despite the fact that the word ‘business’ is used in the legislation to refer to property letting and section 162 only requires the transfer of a ‘business’, if you only have one or two properties, HMRC may argue that section 162 does not apply on the basis that renting out a couple of properties does not really constitute a ‘business’;
- There may be problems with your lenders agreeing to transfer the mortgages into the company;
- Stamp duty land tax (SDLT) is payable by the company based on the market value of the properties transferred. If the properties are ‘dwellings’ (as against commercial property) there is a potential relief available. ‘Multiple dwellings relief’ means that the rate of SDLT is based not on the total value of all the properties, but on the average value per ‘dwelling’. This may even be below the SDLT threshold of £125,000 – but in that case there is a minimum rate of 1% on the transaction.
With the properties in the limited company, not only will the rental profits be taxed at 20%, but so will any capital gains on the sale of a property, in contrast to the 28% rate for an individual who pays income tax at 40%.
Planning Tip:
Assuming you have a sizeable property portfolio, a limited company may be the best vehicle for you, but transferring an existing business into a company can be complicated, and you should seek advice from a tax consultant before taking any action.
