As a property owner, you may have heard that you should not own a company in your own name. Instead, you should own it through a limited company. There are certain benefits to doing so. However, you should know all the factors before you decide. This guide is here to help you do just that. It will answer questions such as, can I sell my house to my limited company and what are the pros and cons of it?
First, let’s discuss the definition of a limited company. Then, we can move on to more complex matters as to why you should sell your property to a company.
What is a Limited Company in the UK?
When you hear the term limited company, you may think of it is as a company that has limitations and no freedom. Yet, that is not the case. ‘Limited liability’ means that your personal assets and liabilities remain separate from that of the business’.
If you want to set up a limited company, then you must know that it should have a unique name. No other business must have the same name. At the end of the name, you use Limited or Ltd. A limited company comes with its own advantages.
If things do not go well, then a limited company provides you with added protection and security. You are not responsible for any financial losses or liabilities that the business makes. It is limited to the amount you have put in the company.
Since a limited company has its own distinct entity status, it is gets loans and business investments easily. You, as an individual, will find it more difficult to do so. With the help of a limited company accountant, you can take full advantages of tax benefits.
Can I Sell My House to My Limited Company?
The short answer is yes, you can sell your property to your limited company. Under Section 24 of the Finance Act 2015, property owners who have properties in their own names can no longer use their mortgage payments as tax deductions. This is also called the ‘Tenant Tax’. According to this legislation, property owners need to pay income tax on all their earnings from their properties. They cannot deduct interest payments. So, can I sell my house to my limited company?
However, property owners can still access a credit of 20%. These changes have a tremendous impact on high-rate taxpayers as they cannot claim back as much as before. While it does not affect most property owners, some basic-rate taxpayers cannot deduct mortgage payments from their earnings. As a result, they fall within the higher tax bracket. You can work around these different tax rules by forming a limited company and selling your property to it. Through 2017 to 2017, the government passed this legislation. In April 2020, it was finalised.
What are the Tax Implications of Selling Property to a Limited Company?
As you know, you do not need to pay income tax when you sell your property to a limited company. The tax regulations differ in this case.
It is not a transfer of property. Therefore, you must bear the same costs as when you and purchase and sell a house in the usual way.
You must consider quite a few taxes and costs. Thus, it is ideal to discuss your circumstances with an experienced account or tax advisor. Then, can I sell my house to my limited company?
Corporation Tax and Dividends Tax
You no longer need to pay income tax on your entire rental earnings if you own properties through a limited company. The rate of income tax is as follows:
40% – £50,271 and £125,140
Although you must pay the corporation tax. Which is 25% on profits. For property companies that earn less than £50,000 per year, it is 19%.
After selling your house to a limited company, if you decide to sell it, you end up paying corporation tax.
Furthermore, if you withdraw additional dividends from the company, then you owe dividend tax. This ranges from 8.75% up to 39.35%. Please note that your accountant can advise you on the tax-free allowance which you can avail.
When directors of limited companies decide to extract funds through a salary, then there are other tax and regulatory implications.
Capital Gains Tax (CGT)
As a connected person who is selling their house to a limited company, you need to pay capital gains tax. You pay this tax on the difference between the original purchase price and the current sale price.
According to your tax band, for a residential property, the range is between 18% to 28%. Whereas it is 10% to 20% for non-residential properties. Nevertheless, you can defer the payment of capital gains tax. For that, you must qualify for incorporation relief. Therefore, can I sell my house to my limited company?
Stamp Duty Land Tax (SDLT)
When purchasing a property through a limited company, Stamp Duty Land Tax (SDLT) applies to its market value or purchase price. Depending on your situation, Stamp Duty Land Tax (SDLT) land tax can vary. If you want to find out how much you will owe, you can use an online Stamp Duty Land Tax (SDLT) calculator.
Also, you must consider the 3% second property surcharge.
Early Repayment Charges (ERCs)
Suppose you decide to sell your house that has an existing mortgage to a limited company. In that case, you can end up paying an exit fee because you changed the mortgage contract early. Furthermore, if you pay off a buy-to-let mortgage early, then redemption penalties may come your way.
Step-by-Step Guide to Selling Your Property to Your Limited Company
If you are planning to sell your home to your limited company, then you will find that the process is like selling and purchasing at the same time as an individual. Yet, there are certain differences between the two processes. Then, can I sell my house to my limited company?
It is simple enough to form a limited company. However, you must perform administrative tasks regularly. For example, filing your company accounts.
It is obligatory that the sole purpose of your company is as a Special Purpose Vehicle (SPV). This means you register it only for property investment.
Usually, investors’ purchasing properties in a limited company use SIC codes. They can use one or more of the following:
68100 – Buying and Selling of Own Real Estate
68209 – Other Letting and Operating of Own or Leased Real Estate
68320 – Management of Real Estate
Property owners can use trading companies that already exist. However, you should know that there are additional complications when you seek out finance. This is because mortgage lenders may take extra verification steps.
Step 1: Finding a Conveyancing Solicitor
Even though you have the option to do it yourself, it is better to reach out to a qualified conveyancer. They will deal with all legal aspects of the process of selling to the company.
Step 2: Finding Out the Current Market Value
You cannot minimise the amount of tax you owe by selling your house to yourself at a discount price. This means that you need to sell your property at its market value. A professional valuer will evaluate it. They are registered at the Royal Institute of Chartered Surveyors. So, can I sell my house to my limited company?
Step 3: Applying for a Buy -to -Let Mortgage
This process is a lot simpler if you can purchase your property through cash. When you are buying as a company, it is difficult to obtain mortgage financing. Therefore, you should talk to your lender about your options. It is possible for you to use the equity in your house as a deposit. Otherwise, you can use other savings that you have.
Step 4: Completion of Sale
You can finally make the purchase and complete the sale once you are ready. Make sure that you do both on the same day. This way, you can pay yourself right away. If you fail to do so, then you may require a bridging loan.
|Factor||Selling your house to yourself||Selling your house to a limited company|
|Tax savings||Yes, you can qualify for tax relief if you are a high-rate taxpayer.||Yes, you can save money on tax by selling your house to a limited company.|
|Growth of business||You can reinvest your money in your business to grow it.||You can grow your property portfolio by reinvesting your money in your limited company.|
|Transferring to family members||You can appoint your family members as directors or shareholders in your limited company.||This can be advantageous for inheritance tax.|
|Limited liability||Your personal assets are protected if your business fails.||Your personal assets are protected if your limited company fails.|
|Access to a director’s loan account||You can create a director’s loan account to borrow money from your limited company tax-free.||You can use other savings to purchase more properties and redeem them through a director’s loan later.|
|Minimal stress testing||Lenders may require less income when companies take out a mortgage.||This can be beneficial for you if you are struggling to get a mortgage.|
|Additional costs||You may have to pay additional costs, such as legal fees and Stamp Duty Land Tax (SDLT).||You may have to pay additional costs, such as legal fees, Stamp Duty Land Tax (SDLT), and corporation tax.|
What are the Advantages of Selling Your House to a Limited Company?
If you decide to sell your property to your limited company, then you can gain a lot of benefits. They include the following:
You can qualify for tax relief by selling your house to a limited company. If you are a high-rate taxpayer who owns properties in their own name, you can save significantly.
Growth of Business
You do not just save money in the short term. If you sell your home to a limited company, you can grow your business through re-investing. As a result, you can have a larger property portfolio. However, can I sell my house to my limited company?
As a property owner, selling to a limited company is the best way to operate. Unless they reverse Section 24.
Transferring to Family Members
Another benefit of selling your property to a limited company is that you can appoint your family members as directors in the business. Or as shareholders. For inheritance tax, this can prove as advantageous.
Your Liability is Limited
If you face any problems as a property owner, they will not have any effect on you as an individual. In the scenario where the business falls apart, your credit score is secure. Also, you will not lose all your savings.
Access to a Director’s Loan Account
You can create a director’s loan account when you sell your property to your limited company. That is, if you sell it at its present market value. You must deduct the mortgage balance. Yet, you can repay the loan back to yourself free of tax.
Moreover, you can use other savings to purchase more properties. You can redeem them through a director’s loan later. Moreover, can I sell my house to my limited company?
Minimal Stress Testing
For limited companies, the process of mortgage application is different. Perhaps this is beneficial for you. When companies take out a mortgage, lenders can sometimes require less income.
What are the Disadvantages of Selling Your House to a Limited Company?
It is possible that selling your property to a limited company is not the right decision for you. There are several disadvantages to doing so that you must consider. They include the following:
You save a lot of money by selling your home to a limited company. Yet, you will end up paying certain additional expenses. Legal fees are costly when you only sell or purchase a property. When you do both simultaneously, the finance costs go up. Not to mention that you must pay the standard costs of running a limited company. Additional accountancy costs and bookkeeping fees apply when you file your annual company accounts. As discussed previously, you owe Stamp Duty Land Tax (SDLT), capital gains tax, and more. All these add up to a high amount. Then, can I sell my house to my limited company?
Harder to Extract Profits
Even though you gain direct access to accumulate capital, you face dividend tax. This applies when you take out funds from your limited company. Depending on the tax bracket you fall under, this varies accordingly.
Higher Interest Rates
When you purchase a property as a limited company instead of as an individual, then you end up paying higher mortgage interest rates. However, it is not all bad. It is no longer as big of an issue. Especially if you compare it to the tax you owe when you own rental properties in your own name.
Risk of Losing Your Property
You cannot lose all your personal savings in case of any issues when purchasing a property through a limited company. Nevertheless, your property is tied to the company. Your property is at risk when the company goes down. The good news is that your personal credit rating is secure. In case you fail to pay bills that the company owes or if tenants do not pay, it is protected.
Problems in Getting a Loan
Undoubtedly, there are benefits to getting a director’s loan. However, limited company mortgage lenders prefer to lend to people that use the property as an investment. If you are planning to use it as a residential property, then you are probably going to find it difficult to obtain a loan.
There are other reasons for lenders refusing a loan. For example, your inability to give enough collateral or security. They can also refuse because of your inexperience. So, can I sell my house to my limited company?
Suppose you decide to live on a property that a limited company has commercial mortgage finances. If you are living there as if it is your primary residence, then this is probably a breach of your lender’s term and conditions.
Furthermore, if a company has no trading history, then some lenders are not likely to grant the mortgage. There are certain lenders that steer clear of lending to a limited company. This limits your options. Please note that you do not have the right to port your personal buy-to-let mortgage on a limited company mortgage.
High Costs of Bridging Loan
Suppose you cannot pay cash for the sale of your property. Then, you take out a bridging loan. By doing so, you end up paying high interest costs and a range of other fees. Which is not good, is it?
|Limited liability||Extra costs|
|Tax savings||Higher interest rates|
|Business growth||Difficult to obtain loan|
To conclude, whether selling your property to your limited company is the right option depends on your circumstances. You must do a cost-benefit analysis, as it will assist you in weighing your options accurately. If you own plenty of properties in your name, it is worth absorbing the additional taxes and any associated expenses. This is especially true for those who want to keep their portfolio for the long run. However, you have the option to sell a few or all the properties to reduce or get rid of the overall level of secured debt. For example, property owners sell and buy properties in a company structure. As always, it is ideal to reach out for expert advice before deciding to sell your home to a limited company.