Moving rental flat to a limited company
Discussion
Hi All,
I’m currently letting out my old flat that I used to live in and I am considering creating and running it through a limited company to save the amount of income tax I’m paying.
I am trying to work out if this is going to be beneficial or not, but it’s complicated with all the different tax regulations.
I thought that I could let the flat out under the limited company until I retire, then start drawing the money out as dividends paying lower 8.75% tax. This with the 19% corporation tax should work out cheaper than my current income tax band. I think I will be better off by about £1300 per year, which isn't a huge sum, but it will certainly add up over the years. I’m not sure if it’s worth it if the administration is that much harder and it restricts how I can use the money personally.
By the time I’m ready to retire, the company should have built up quite a stash of money that I could draw down from. I was reading about illegal dividends and it’s not clear to me if I am I allowed to withdraw more money in dividends than the flat has made within the tax year? Or does it not matter as long as the money I am withdrawing is from profits made in previous years?
I’m also looking at the stamp duty aspect. I bought the house I now live in, January 2021, which meant I had to pay the 3% second property stamp duty. I did not have to pay the usual stamp duty because of the covid relief that was in place at the time.
I understand in some situations you can reclaim the stamp duty if you sell the first property within three years. Does it make a difference if it’s my own company I sell it to?
I paid £11.5k stamp duty on the house and as the flat is worth £200k, the company would have to pay £7.5k stamp duty, so that looks like I’d end up with a £4k bonus minus the solicitor fees.
I realise I won’t be able to withdraw the rental income from the limited company without a heavy tax penalty until I give up work. Unfortunately this means I would not be able to use it to help pay off my house mortgage. There's no mortgage on the flat.
Seems to be a lot of swings and roundabouts. Is there anything that I’m missing?
I suppose at some point I will want to sell the flat, but in order to benefit from the lower tax, I’ll have to withdraw the money from the company over a number of years to keep it at the basic dividends rate.
I’m currently letting out my old flat that I used to live in and I am considering creating and running it through a limited company to save the amount of income tax I’m paying.
I am trying to work out if this is going to be beneficial or not, but it’s complicated with all the different tax regulations.
I thought that I could let the flat out under the limited company until I retire, then start drawing the money out as dividends paying lower 8.75% tax. This with the 19% corporation tax should work out cheaper than my current income tax band. I think I will be better off by about £1300 per year, which isn't a huge sum, but it will certainly add up over the years. I’m not sure if it’s worth it if the administration is that much harder and it restricts how I can use the money personally.
By the time I’m ready to retire, the company should have built up quite a stash of money that I could draw down from. I was reading about illegal dividends and it’s not clear to me if I am I allowed to withdraw more money in dividends than the flat has made within the tax year? Or does it not matter as long as the money I am withdrawing is from profits made in previous years?
I’m also looking at the stamp duty aspect. I bought the house I now live in, January 2021, which meant I had to pay the 3% second property stamp duty. I did not have to pay the usual stamp duty because of the covid relief that was in place at the time.
I understand in some situations you can reclaim the stamp duty if you sell the first property within three years. Does it make a difference if it’s my own company I sell it to?
I paid £11.5k stamp duty on the house and as the flat is worth £200k, the company would have to pay £7.5k stamp duty, so that looks like I’d end up with a £4k bonus minus the solicitor fees.
I realise I won’t be able to withdraw the rental income from the limited company without a heavy tax penalty until I give up work. Unfortunately this means I would not be able to use it to help pay off my house mortgage. There's no mortgage on the flat.
Seems to be a lot of swings and roundabouts. Is there anything that I’m missing?
I suppose at some point I will want to sell the flat, but in order to benefit from the lower tax, I’ll have to withdraw the money from the company over a number of years to keep it at the basic dividends rate.
Edited by AlexC1981 on Sunday 19th June 18:46
AlexC1981 said:
I understand in some situations you can reclaim the stamp duty if you sell the first property within three years. Does it make a difference if it’s my own company I sell it to?
Shouldn’t make a difference (the company has a separate legal personality) but make sure the valuation is realistic and don’t forget to account for conveyancing fees. You also have the costs of running your ltd company. Unless you’re into the highest tax rates you’d be slightly better off but it may not be worth the hassle/ongoing expense of moving it for just one £200k property?
If you sell it personally you will be able to avail of some Main Residence Relief as it was once your home.
You would lose that if it was later sold by a limited company.
Also, individuals pay CGT on residential property at 18% or 28% depending on their other personal income. Companies pay Corporation tax on a capital disposal at 19%. Corporation Tax is increasing soon to 25% depending on the level of profits in a given year. That profit level includes any capital gains.
You would lose that if it was later sold by a limited company.
Also, individuals pay CGT on residential property at 18% or 28% depending on their other personal income. Companies pay Corporation tax on a capital disposal at 19%. Corporation Tax is increasing soon to 25% depending on the level of profits in a given year. That profit level includes any capital gains.
Thanks Eric, I have been looking at that as well. In the 10 years I lived there it increased in value from £104k to £200k. I don't think it's going to double in value again over the next 10 years, but if I sell it in say 18 years, it's going to have 28 years appreciation less private residence relief and £96k additional increase when privately owned vs 18 years for the company.
With all that taken into account, I think I'll be about £30k better off with a private sale. It's all getting a bit hyperthetical now. When I take into account the rental income in my "vs" scenario they end up about the same.
With all that taken into account, I think I'll be about £30k better off with a private sale. It's all getting a bit hyperthetical now. When I take into account the rental income in my "vs" scenario they end up about the same.
Sell it to the Ltd company. Owed money is then classed as a directors loan. You can charge interest on the loan so that helps amount owed to grow. After tax, any monies left from income can be taken back by you tax free as directors loan repayment.
If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
Business Asset Disposal Relief - BADR (NOT Entrepreneur's Relief - which was abolished a couple of years ago) is available on the disposal of a business or the disposal of the assets of a business on cessation of said business.
A company which derives its income from residential letting is not looked on as a business by HMRC so will not qualify for Business Asset Disposal Relief.
The only occasion where BADR could be claimed would be if the property was being rented out as a Holiday Let (which is a "deemed" business).
Per HMRC
DEEMED TRADE
For BADR to be available, a gain must arise on the disposal of the whole or part of a trading business; or on the sale of assets used in a trading business which has ceased. A business of residential property letting is not a trade, however per s. 241(3A) Taxation of Chargeable Gains Act (TCGA) 1992 , the commercial letting of furnished holiday accommodation is deemed to be a trade for BADR.
The conditions that must be satisfied in order for a property business to qualify as furnished holiday accommodation are set out in Chapter 6, Part 3 Income Tax (Trading and Other Income) 2005 (ITTOIA) and are as follows. The accommodation must be:
furnished
let on a commercial basis with a view to realising a profit
available for commercial letting to the public for at least 210 days during the tax year
actually let to members of the public for at least 105 days during the tax year (excluding periods of longer term occupation), and
not have more than 155 days of letting during periods of “longer-term” occupation.
A company which derives its income from residential letting is not looked on as a business by HMRC so will not qualify for Business Asset Disposal Relief.
The only occasion where BADR could be claimed would be if the property was being rented out as a Holiday Let (which is a "deemed" business).
Per HMRC
DEEMED TRADE
For BADR to be available, a gain must arise on the disposal of the whole or part of a trading business; or on the sale of assets used in a trading business which has ceased. A business of residential property letting is not a trade, however per s. 241(3A) Taxation of Chargeable Gains Act (TCGA) 1992 , the commercial letting of furnished holiday accommodation is deemed to be a trade for BADR.
The conditions that must be satisfied in order for a property business to qualify as furnished holiday accommodation are set out in Chapter 6, Part 3 Income Tax (Trading and Other Income) 2005 (ITTOIA) and are as follows. The accommodation must be:
furnished
let on a commercial basis with a view to realising a profit
available for commercial letting to the public for at least 210 days during the tax year
actually let to members of the public for at least 105 days during the tax year (excluding periods of longer term occupation), and
not have more than 155 days of letting during periods of “longer-term” occupation.
Eric Mc said:
And don't forget that an individual gets an annual Capital Gains Tax allowance (currently £12,300) which a limited company does not.
Are you married?
Is the property jointly owned?
Got that thanks. Just lil' old me unfortunately. Are you married?
Is the property jointly owned?
AMTony said:
Sell it to the Ltd company. Owed money is then classed as a directors loan. You can charge interest on the loan so that helps amount owed to grow. After tax, any monies left from income can be taken back by you tax free as directors loan repayment.
If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
I can't get my head around that! I start a limited company, then transfer the flat to the company, which means it now owes me personally £200k? I don't really understand how the selling process works. It seems a bit chicken and egg. How do I loan the company £200k when I need the company to give me £200k first for the flat?If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
Then I set a high interest rate so it covers the rental income and I can take that money out tax free (apart from what the company pays in corporation tax)? There's no mortgage on the flat so the interest rate would have to be high to cover the income plus property appreciation. I feel like this could get me into trouble!
AlexC1981 said:
Eric Mc said:
And don't forget that an individual gets an annual Capital Gains Tax allowance (currently £12,300) which a limited company does not.
Are you married?
Is the property jointly owned?
Got that thanks. Just lil' old me unfortunately. Are you married?
Is the property jointly owned?
AMTony said:
Sell it to the Ltd company. Owed money is then classed as a directors loan. You can charge interest on the loan so that helps amount owed to grow. After tax, any monies left from income can be taken back by you tax free as directors loan repayment.
If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
I can't get my head around that! I start a limited company, then transfer the flat to the company, which means it now owes me personally £200k? I don't really understand how the selling process works. It seems a bit chicken and egg. How do I loan the company £200k when I need the company to give me £200k first for the flat?If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
Then I set a high interest rate so it covers the rental income and I can take that money out tax free (apart from what the company pays in corporation tax)? There's no mortgage on the flat so the interest rate would have to be high to cover the income plus property appreciation. I feel like this could get me into trouble!
As I said, see a good accountant who will work through the basics of this.
If you need the cash in one lump then simply just sell.
Never do anything outside allowable rules as it will land you in trouble.
AlexC1981 said:
AMTony said:
Sell it to the Ltd company. Owed money is then classed as a directors loan. You can charge interest on the loan so that helps amount owed to grow. After tax, any monies left from income can be taken back by you tax free as directors loan repayment.
If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
I can't get my head around that! I start a limited company, then transfer the flat to the company, which means it now owes me personally £200k? I don't really understand how the selling process works. It seems a bit chicken and egg. How do I loan the company £200k when I need the company to give me £200k first for the flat?If you sell and house value has gone up, the loan will also have increased via interest owed.
If you sell the house which is the ltd company then sell the company. This will attract entrepreneurs relief at i think 10%?
Beware as if company isn’t a trading company ie just a property rental business, it will attract CGT.
See a good accountant to implement.
Then I set a high interest rate so it covers the rental income and I can take that money out tax free (apart from what the company pays in corporation tax)? There's no mortgage on the flat so the interest rate would have to be high to cover the income plus property appreciation. I feel like this could get me into trouble!
Still not married, never have been and no dependants 
I think it's only going to be worth the hassle of running it as a company if I get another property. There's a part of me saying I'm a fool for not remortgaging half the flat value for a deposit on a house to rent out with an interest only mortgage, then sell it after 15 years. It's a small risk as property should go up in 15 years, but I don't know if I want more hassle in my life.
AMTony said:
Didn’t say set rent high to cover rental income - thats probably illegal.
As I said, see a good accountant who will work through the basics of this.
If you need the cash in one lump then simply just sell.
Never do anything outside allowable rules as it will land you in trouble.
Cheers, that's just me adding 1+1 and getting 3. The rules are very complicated and it's hard to understand the differences between legitimate ways of doing things and going too far.As I said, see a good accountant who will work through the basics of this.
If you need the cash in one lump then simply just sell.
Never do anything outside allowable rules as it will land you in trouble.
I think it's only going to be worth the hassle of running it as a company if I get another property. There's a part of me saying I'm a fool for not remortgaging half the flat value for a deposit on a house to rent out with an interest only mortgage, then sell it after 15 years. It's a small risk as property should go up in 15 years, but I don't know if I want more hassle in my life.
As others have said, probably not worth the cost and energy to pursue if only ever going to be one property within the Ltd Co.
I can't help with the CGT or reclaiming the stamp duty, but I did something similar to what you are proposing...
In 2019, bought family home and 'sold' my flat to the Ltd Co.
Stamp duty had to be paid on the flat at market value for the change of ownership.
As someone else mentioned, the value of the flat went on to the Ltd Co balance sheet as a director loan, so that money can be withdrawn tax free as and when it is needed/profits allow.
It made sense for my Wife and I at the time as it was our long term aim to build a portfolio (4 properties so far) whilst we are both still working full time. I am also a higher rate tax payer which meant avoiding paying 40% income tax on the rental income for my portion.
Don't forget mortgages and conveyancing are more expensive for Ltd Co.
Even if you have to pay for advice and it turns out not the right avenue for you, it'll be worth it to clarify things and avoid making much more expensive mistakes down the line.
Hope that helps.
I can't help with the CGT or reclaiming the stamp duty, but I did something similar to what you are proposing...
In 2019, bought family home and 'sold' my flat to the Ltd Co.
Stamp duty had to be paid on the flat at market value for the change of ownership.
As someone else mentioned, the value of the flat went on to the Ltd Co balance sheet as a director loan, so that money can be withdrawn tax free as and when it is needed/profits allow.
It made sense for my Wife and I at the time as it was our long term aim to build a portfolio (4 properties so far) whilst we are both still working full time. I am also a higher rate tax payer which meant avoiding paying 40% income tax on the rental income for my portion.
Don't forget mortgages and conveyancing are more expensive for Ltd Co.
Even if you have to pay for advice and it turns out not the right avenue for you, it'll be worth it to clarify things and avoid making much more expensive mistakes down the line.
Hope that helps.
J4rvis said:
As others have said, probably not worth the cost and energy to pursue if only ever going to be one property within the Ltd Co.
I can't help with the CGT or reclaiming the stamp duty, but I did something similar to what you are proposing...
In 2019, bought family home and 'sold' my flat to the Ltd Co.
Stamp duty had to be paid on the flat at market value for the change of ownership.
As someone else mentioned, the value of the flat went on to the Ltd Co balance sheet as a director loan, so that money can be withdrawn tax free as and when it is needed/profits allow.
It made sense for my Wife and I at the time as it was our long term aim to build a portfolio (4 properties so far) whilst we are both still working full time. I am also a higher rate tax payer which meant avoiding paying 40% income tax on the rental income for my portion.
Don't forget mortgages and conveyancing are more expensive for Ltd Co.
Even if you have to pay for advice and it turns out not the right avenue for you, it'll be worth it to clarify things and avoid making much more expensive mistakes down the line.
Hope that helps.
When you "sold" the property to the limited company, did you not have to account for CGT on the sale of the property?I can't help with the CGT or reclaiming the stamp duty, but I did something similar to what you are proposing...
In 2019, bought family home and 'sold' my flat to the Ltd Co.
Stamp duty had to be paid on the flat at market value for the change of ownership.
As someone else mentioned, the value of the flat went on to the Ltd Co balance sheet as a director loan, so that money can be withdrawn tax free as and when it is needed/profits allow.
It made sense for my Wife and I at the time as it was our long term aim to build a portfolio (4 properties so far) whilst we are both still working full time. I am also a higher rate tax payer which meant avoiding paying 40% income tax on the rental income for my portion.
Don't forget mortgages and conveyancing are more expensive for Ltd Co.
Even if you have to pay for advice and it turns out not the right avenue for you, it'll be worth it to clarify things and avoid making much more expensive mistakes down the line.
Hope that helps.
Eric Mc said:
So, you gave away your former main residence to a limited company (presumably for no consideration i.e the company paid nothing)?
Nope, as I said in the initial post..."... value of the flat went on to the Ltd Co balance sheet as a director loan, so that money can be withdrawn tax free as and when it is needed/profits allow."No actual money changed hands if that's what you mean by paid nothing. The Ltd Co still owes us the value.
OK - the company bought the property from you but didn't pay any cash up front. Instead, it owes the sale price to you which it can pay to you in dribs and drabs through the director's loan account. I assume the sale price agreed was based on market value of the property on the date the property was transferred to company ownership.
Now obviously, this means the company does not have to account for any tax on these payments as it is merely repaying a loan to you. But, you would not have had to pay any tax on the proceeds of the property anyway as it was exempted from CGT due to it being your main residence. Now, when the property does eventually get sold, it WILL generate a tax liability for the company.
And you will possibly have to pay personal income tax when you extract any of the sales proceeds generated from the property sale out of the company.
Now obviously, this means the company does not have to account for any tax on these payments as it is merely repaying a loan to you. But, you would not have had to pay any tax on the proceeds of the property anyway as it was exempted from CGT due to it being your main residence. Now, when the property does eventually get sold, it WILL generate a tax liability for the company.
And you will possibly have to pay personal income tax when you extract any of the sales proceeds generated from the property sale out of the company.
Thanks to everyone who gave advice, I think I will keep it in my own name for now. I have another 18 months left in case I change my mind.
I'm having some thoughts of buying another property to let, secured against the flat and keeping it on an interest only mortgage for the next 15-20 years before selling for profit. I think I will wait at least 6 months to see where property prices and interest rates are going before deciding.
I've not used a mortgage broker before apart from a brief consultation when I bought the flat years ago. Is it recommended to see one for this sort of mortgage? I'm not having much luck finding one online.
I'm having some thoughts of buying another property to let, secured against the flat and keeping it on an interest only mortgage for the next 15-20 years before selling for profit. I think I will wait at least 6 months to see where property prices and interest rates are going before deciding.
I've not used a mortgage broker before apart from a brief consultation when I bought the flat years ago. Is it recommended to see one for this sort of mortgage? I'm not having much luck finding one online.
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