Understanding Taxation for Buy to Let Limited Companies | A Guide
If you are running (or setting up) a buy-to-let limited company tax rules differ from those if you are owning buy to let properties in your own name. Here’s a guide to understanding tax for buy-to-let limited companies.
Limited Company or Individual Ownership: Understanding the Differences in Taxation
When aiming to understand taxation for companies it is important to understand that a limited company is a legal entity in its own right quite separate from its owners, shareholders or directors.
When owning property in your own name, perhaps as a sole trader, you are personally liable for taxes on this property ownership. For example, income from your property activities is added to your other income and it is taxed as a whole.
A limited company is also a separate entity from a financial and tax point of view, however. This means that the obligation to account for and pay taxes on the business activities of the company falls on the limited company rather than its owners.
What Taxes do Buy-to-Let Limited Companies Pay?
In general terms, buy-to-let limited companies pay the same taxes at the same rates as other limited companies.
Buy-to-let limited companies are more likely to be involved in the buying, selling, letting and ownership of property than limited companies generally, however. This means that limited companies will need to have an understanding of the taxes that apply to buying, selling letting and ownership of property.
Some of the taxes that apply to buy to let limited companies include Stamp Duty, Corporation Tax and Value Added Tax.
Buy-to-let limited companies will need to pay Stamp Duty Land Tax (SDLT) on property they purchase.
SDLT applies in England and Northern Ireland. Scotland has Land and Buildings Transaction Tax (LBTT) and Wales has Land Transaction Tax (LTT) which differ.
Limited companies pay the normal rates of Stamp Duty on residential property worth over £125,000 plus a 3% surcharge. (This applies to all additional property purchases.)
The rates of Stamp Duty are different for non-residential, commercial and mixed-use property and Stamp Duty is only applicable when the property costs more than £150,000.
Limited companies (as well as individuals) can claim relief to reduce the Stamp Duty payable when buying more than one dwelling where a transaction or a number of linked transactions includes interests in more than one dwelling.
When aiming to understand tax for buy-to-let limited companies it is important to have an understanding of Corporation Tax. Limited companies do not pay Income Tax and National Insurance Contributions on their income but pay Corporation Tax instead.
What is Corporation Tax?
Corporation Tax is levied on UK limited companies and some other organisations including housing associations, clubs and societies. It is based on the annual taxable profits that a company generates.
Limited companies need to register for Corporation Tax when they start doing business. They must then file their Company Tax Return (CT600) within 12 months after the end of their accounting period. This will indicate how much Corporation Tax is payable. Any Corporation Tax payable is due by the relevant deadline which in most cases is 9 months and 1 day after the end of their accounting period.
What is Corporation Tax Charged On?
Corporation Tax is levied on limited company profits after salaries and other allowable business expenses have been deducted but before dividends to shareholders are paid.
Taxable profits for Corporation Tax purposes include the money a company makes from doing business (known as its trading profits), investments, and from selling assets for more than they cost (known as chargeable gains). Assets include machinery, land and property.
What are the Rates of Corporation Tax?
Unlike Income Tax, Corporation Tax does not have a tax-free allowance. It is levied on the total amount of trading profits.
Corporation Tax doesn’t have a scale of tax rates based on income. From 1 April 2015, there has been a single Corporation Tax rate for non-ring fence profits. The Corporation Tax main rate in the UK is 19% for all business profits.
In the 2021 Budget, the current Government announced changes to the Corporation Tax rate. From April 2023, taxable profits above £250,000 will be subject to an upper limit of 25%. If profits are £50,000 or less then they are subject to a lower limit rate of 19%. If profits are in between the lower and upper limits then the marginal rate will effectively be 26.5% with the benefit of marginal relief.
Corporation Tax for Buy-to-Let Companies
A significant factor for buy-to-let limited companies is that while tax legislation now restricts the mortgage interest individuals can claim against tax these restrictions do not apply to limited companies. Limited companies can still claim the interest they pay on buy-to-let mortgages as an allowable expense against income.
Potentially and under the current Corporation Tax regime, it is more tax efficient to own buy-to-lets within a buy-to-let limited company than owning them personally, especially for higher rate taxpayers. However, it is absolutely essential to take expert professional advice on this matter, especially bearing in mind future possible Corporation Tax changes.
Capital Gains Tax
Buy-to-let limited companies are not liable to pay Capital Gains Tax (CGT) on their capital gains when assets are disposed of as individuals are. However, it is useful to understand how this difference affects taxation for limited companies.
Capital Gains Tax is a tax which is charged on any gain made when you dispose of (or sell) chargeable assets less certain allowances. Chargeable assets include personal possessions worth more than £6,000 (except cars), stocks and shares, business assets and investment property.
Instead of CGT companies pay Corporation Tax on their profits. This can have tax implications where a profit arises following the letting or sale of a property. Owning a buy-to-let through a limited company can potentially be a way of saving tax since currently the higher rate of CGT is 28% but Corporation Tax is 19%. (Although note the pending changes detailed above.)
Value Added Tax
Generally, limited companies with a turnover over the current threshold (£85,000 per annum) are required to register for Value Added Tax or VAT. This also applies to non-limited businesses.
VAT registered limited companies must charge VAT on goods and services they provide at the appropriate rate. They may reclaim the VAT they pay on purchases.
Residential property letting is normally exempt for VAT purposes. VAT does not have to be charged on residential rents. Neither may the VAT paid, be reclaimed. The position depends on what other trading income you may have, however.
With commercial buildings, landlords may exercise what is known as an option to tax. VAT is then charged on the rent and VAT on allowable expenses may be reclaimed.
VAT is chargeable on furnished holiday lets at the standard rate (currently 20%).
Other taxes buy-to-let limited companies might have to pay, include Business Rates and Council Tax on property they own, except where it is occupied by a tenant who pays these taxes.
Special Purpose Vehicles and Holding Companies
When understanding taxation for buy-to-let limited companies it is important to understand the importance of using the correct limited company structures.
It is possible to own buy-to-let property through a trading limited company which has other business activities as well as property. There can be disadvantages to this, however. It means it is difficult to separate the buy-to-let from the company’s other activities.
For this reason, a limited company which is a special purpose vehicle or SPV is often considered a way to own property. The SPV is a company that is incorporated for a specific purpose such as owning property.
Consideration should be given to whether an SPV should own several buy-to-lets, or whether each should be owned by a separate SPV. A holding company may be used to own a number of related SPVs as subsidiaries. The way ownership is structured and therefore in which buy to let income, profits and losses are accrued will have important implications for tax purposes.
This article is intended only as general information and not intended to form financial advice or tax advice on the subject of buy-to-let company taxation. To gain a proper understanding of taxation for buy-to-let limited companies it is essential to take advice from a financial adviser who is experienced in both property tax and corporate tax.