Any ideas on the pros and cons of running a Buy-to-Let business through a Limited Company rather than a 2 person partnership.
Size about 30 plus small properties (approx value £1.5m) loans & mortgages approx £1.2m, Net Profit approx. £40K.
Other than the tax advantages of Ltd Co status, are there any pitfalls in taking this route.
TIA David (Return address is invalid)
That's rather an unfortunate turn of phrase. You make the tax advantage sound like a pitfall. Perversely, see below, it may well be.
Is this an existing business or a proposed one? If proposed, you will find it more difficult to get mortgage loans, let alone to 80% LTV, or as cheaply, as a company than as individuals. If existing, you will incur a CGT hit on transferring the properties into the company.
Suppose you are higher rate taxpayers. Corporation tax on £40k profit is £7125. Paying yourself the remaining £32875 as dividends will cost you £8219 in income tax. Bottom line: You each get £12328 in your pocket. As partnership, you'd pay IT+NI at 41%, and keep £11800 each. So the benefit of using a company is only £528pa each.
If, however, you're standard rate taxpayers (and assuming for ease of calculation that you already have at least £6575 of other income), then the company method will see you losing only £7125 CT and no extra income tax on the dividends: £16437 in each of your pockets. But as partners, you'd pay 22%IT + 8%NI on £20k each [*] leaving you £14k each, so the company route would save you £2436.
If you're border line standard/higher rate, the saving will vary on a sliding scale between those two values.
[*] Not sure at the mo' whether the first £4615pa of self-employed income are NI-free in addition to the first £89pw of employment income. If so, you'd save an extra £369 each.But as a company you may well end up paying loan interest at a higher rate than as individuals. If the difference is as much as 1% (it may well be much less, but let me exaggerate for effect here), your profit would drop by £12k, more than enough to wipe out the tax advantage (which with lower profits, will be less anyway).
Most BTLs are investments and thus not subject to NI. The landlord would have to provide significant services for the activities to be a trade.
Thank you for that opinion.
I am fully aware of tax implications, but:
Yes, employment (Class 1 NI) and Self employment (Class 4) limits are separate and relate to the relevant source.
Thanks for that opinion. That was what I was fearing some-one might point out.
David
Shit. Of course. Sorry for failing to take that into account in my answer, it is something I know fine well, being a landlord myself.
It strikes me it might be possible to get around this by buying the properties as an individual and giving mortgages as an individual, but then transferring beneficial ownership to the company without the lender's knowledge, because paper ownership is retained as an individual.
Stamp Duty may be due.
Also, the borrowings could attract a higher rate of interest relief - up to
40%, rather than CT rates.
"May" leaves room for doubt. Could you elaborate? What nuances of circumstance would cause fate to fall on the "will be" side and which on the "won't be" side?
On the face of it, SD is a tax on conveyances of legal title. In what I have in mind there is no such conveyance, nor is there a lease involved, just a transfer of benefit for no consideration.
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