Do I Need to Pay Stamp Duty to Buy a Rental Property Through a Limited Company?

Limited company buy to let mortgage properties have grown enormously in popularity over the last couple of years.

This change is primarily due to the tax relief limitations for private landlords, which mean it can be more profitable to own a buy to let investment through an incorporated business.

There remains a fair bit of confusion about taxes payable, the contrast between private and commercial mortgages, and which option is most favourable.

One of the points to clarify is that businesses do need to pay Stamp Duty and are liable for the 3% second homes levy, as with any individual buyer, so it’s essential to work through all of the associated costs before making any decisions.

In this guide, our mortgage brokers explains Stamp Duty on buy to let properties bought by limited companies and some other cost considerations to bear in mind.

Costs of Transferring a Buy to Let Property to a Ltd Company

First, let’s confirm that you can transfer property from your name, as a private landlord, to a limited company – but there are pros and cons.

A limited company is a separate legal entity, so you can’t simply sign over the asset but need to sell the buy to let property to the company.

Costs include:

• Capital Gains Tax – payable if your rental property has grown in value, against the profit you’ve made on the asset.
• Stamp Duty – payable by the company buying the asset, plus the 3% second home charge.
• Conveyancing fees – a solicitor or conveyancer will need to carry out the formal legal work to transfer ownership of the property to the company.
• Mortgage costs – you’ll need to remortgage onto a commercial buy to let mortgage product for limited companies. If you haven’t had your mortgage long, there may be early repayment charges to account for.

Let’s also be clear that commercial mortgages come with higher interest rates and fees, so it’s well worth taking some time to add up all of the outgoings and work out how much tax-saving you could make.

Stamp Duty for Limited Businesses

While we often think of Stamp Duty as a tax associated with buying a new home, it remains chargeable to companies, partnerships and other trading structures such as investment schemes.

Rates are as follows:

• 15% on any residential home bought for over £500,000.
• 3% second home surcharge on all residential properties over £40,000 (whether this is the first acquisition by the business or not).
• No second home levy is applied to non-residential or mixed-use properties.

If the business buys a trading premise, such as a shop, warehouse or office, the rates are slightly different:

• 0% on commercial sales or transfers up to £150,000.
• 2% on investments from £150,000 and up to £250,000.
• 5% on the balance over £250,000.

Therefore, if a limited company buys a commercial property for £275,000, they will pay £3,250 in Stamp Duty.

If the property is a residential buy to let, the limited company will pay £7,050, as 3% of the value above £40,000.

Comparable Tax Treatment for Limited Company Buy to Let Profits

Given the higher Stamp Duty, it’s easy to struggle to see why it’d be worth transferring a buy to let property to a limited company or setting up a business to purchase new portfolio assets!

The answer is all in the tax treatment of the arising profits.

Private landlords have a personal allowance of £12,570 for 2021/22 and then pay a basic 20% tax on income up to £50,270.

Earnings over this and up to £150,000 are taxed at the 40% higher rate, and over £150,000 at 45%.

Investing in a limited company buy to let means paying corporation tax against profits, which is currently 19% and significantly lower.

Note that corporation tax will increase to 25% by 2023, but that depends on the company profits, with tapered relief applicable.

Therefore, higher or additional rate taxpayers could save a substantial cost by buying a rental property as a limited business.

Dividends drawn and any salary taken from the business will still be liable for tax. Still, any profits left in the company won’t be taxable beyond the 19% corporation tax rate.

Understanding Income Tax on Limited Company Buy to Let Earnings

Most landlords that own a limited company will pay themselves in a mixture of dividends and salary. As we’ve explained, a salary is taxable against the normal bands.

If you take a dividend, this is tax-free up to £2,000 and then charged at 7.5% up to £37,700. Dividends up to £150,000 are taxed at 32.5%.

To compare the options, let’s say you have a property that generates a profit of £80,000 a year:

As a private landlord, you’ll pay income tax, which works out as £19,432:

• £12,570 tax free allowance = £0.
• 20% up to £50,270 = £7,540.
• 40% up to £80,000 = £11,892.

Through a limited company, your corporation tax will be 19% on £80,000 = £15,200.

If you’d like further information or advice about buying a buy to let property through a company, please get in touch with Revolution Brokers.

Our experienced team is available on 0330 304 3040, or you can drop us an email at info@revolutionbrokers.co.uk.