More and more landlords are now transferring ownership of their buy-to-let properties to limited companies instead of letting them to tenants directly. This can come with various tax savings, which are particularly interesting to landlords following the changes to how landlords can claim tax relief, which was fully rolled out last year.

However, setting up a limited liability company (LLC) and letting your property through it can be a complicated process, and there are various requirements for record-keeping and accounting that you must abide by. Setting up an LLC and selling your property to this entity also comes with certain tax liabilities, so it’s a good idea to consult a tax advisor to help you decide if it’s the right move for you.

In this article, we’ll discuss the practicalities of transferring your property portfolio to an LLC and the possible advantages of this structure.

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What is a limited company?

A limited liability company (LLC)  is an entity that is legally separate from its owners and managers. Limited companies must be registered (or ‘incorporated’) with Companies House, a public list of registered companies in the UK. LLCs must submit certain reports and accounts to Companies House, which can be viewed by anyone.

Even if a limited company is owned and operated by one person who works as a sole trader, it is legally distinct from that person. This means that unless there has been fraud or other serious wrongdoing, the person has only limited liability if the company loses money or goes bankrupt.

How do you register a limited company?

Registering a limited company is actually a fairly straightforward process. In most cases, you can do it through a government portal, which requires you to input details about your company and choose a name that isn’t misleadingly similar to any other registered company.

You’ll also have to name the company’s director, secretary and shareholders, and any people with significant control (PSC) over the company. PSC are people with voting rights in the company, or anyone owning more than 25% of its shares.

The process also involves preparing a memorandum of association and articles of association, which are documents that set out how you’ll run your company.

To operate a limited company, you must also register an official address. Once you’ve registered, you have to register for Corporation Tax within three months, though you can usually do this at the same time as registering your limited company.

What information do you need to register an LLC?

To register as an LLC, you’ll need security information such as your place and date of birth, passport number and mother’s maiden name.

You’ll also need to name the company’s director, secretary and shareholder. A company needs to have at least one director, who is responsible for running the company and making sure reports and accounts are properly filed. It’s up to you if you have a secretary to take on some of the roles of the directors.

What are the costs and timescales involved?

The cost of registering a limited company through the online portal is £12. Registration is usually completed within 24 hours.

Other ways to register

You can also register your limited company by post, and this is also the only way to register if you don’t want the word ‘limited’ to appear in your company name. However, it’s better to use the online portal if you can, as registering by post costs £40 and the process can take 8–10 days.

Transferring property to an LLC

Although the word ‘transfer’ is often used to describe this type of transaction, you can’t actually ‘transfer’ a property to the LLC, since this is legally distinct from you as an individual.

Instead, you have to sell the property to the LLC. This can have significant advantages in terms of tax savings, which we will go into further on. But, because of the costs involved in such a transaction, it may only be a smart financial decision if you own a large portfolio.

It’s always a good idea to seek advice from an accountant or tax advisor to determine whether transferring your property to an LLC will save you money.

Paying sale and purchase taxes

Buying and selling property normally requires the payment of certain taxes. Since in this case you are essentially financing both sides of the transaction, this can amount to a costly bill. Usually, you will need to pay:

• Capital Gains Tax (CGT) on any profit made on the property since you bought it (as the seller)
• Stamp Duty Land Tax (SDLT) at a rate depending on the market value of the property

It’s important to note that you are obliged to sell the property to the LLC at its market value — so you can’t set a low purchase price in order to avoid either CGT or SDLT.

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Record-keeping for LLCs

All limited companies must keep accounting records and records about the company itself.

In terms of company records, you have to keep records of:

• Directors, shareholders and secretaries
• The result of votes and resolutions
• Promises of loan repayments and who they must be repaid to
• Indemnities the company makes in case something goes wrong
• Transactions when shares are bought and sold
• Loans or mortgages secured by the company

You also need to keep the following accounting records:

• All money received and spent by the company
• Assets owned by the company
• Debts the company owes or is owed
• Stocks the company owns
• All goods bought and sold (and who they were bought from/sold to)
• Stocktakings

LLCs must also file their full annual accounts and company tax return with Companies House and HMRC at the end of each financial year. You can hire a professional accountant to help you with this.

Advantages of transferring a property to a limited company

There can be significant advantages to letting your properties through an LLC instead of directly to tenants. Specifically:

Limited liability

The entire point of a limited liability company is that your liability in the case of the company failing is limited. Many landlords feel this adds a layer of safety between them and their property. If a limited company becomes unable to meet its debts or liabilities, owners are only responsible for:

• The nominal value of any shares (in the case of shareholders)
• The amount of any guarantee
• The amounts they’ve invested into the company
• The amount of any personal guarantee they’ve made to the company

Tax advantages

One of the main reasons for using a limited company to manage your rental properties is that this approach can offer significant tax advantages. Landlords who let out properties they own personally must pay income tax on the amount of rent their receive, minus any allowed expenses.

The amount of income tax landlords pay depends on which tax bracket they fall into, but for those in the higher and additional bands (with an income of more than £50,000 or £150,000 per year), income tax is paid at the rate of 40 or 45 per cent.

If you let your property through an LLC, however, you will only pay Corporation Tax, which is paid at the rate of 19 per cent — a significant tax saving for landlords.

Getting a buy-to-let mortgage as a limited company

When you sell your property to an LLC, you are no longer its legal owner. Since you can’t take out a mortgage on an asset that you don’t own, you will need to transfer the mortgage to the limited company, which your mortgage provider might not allow you to do.

In many cases, you will need to pay off your existing personal mortgage on the property and take out a commercial one in the name of the LLC instead. Not all mortgage lenders will grant a mortgage to a company, so you may need to look around for one that will. Rates also tend to be higher for mortgages taken out by businesses.

But there are also some advantages to taking out a mortgage as a limited company — most notably, affordability checks are generally not as stringent, so you may be able to borrow more and further expand your portfolio.

Many mortgage providers require your company to be a Special Purpose Vehicle (SPV) which is a specific type of company set up only to buy, sell, hold and let properties.

How do rental profits work?

Naturally, the whole point of owning and managing a property portfolio is to make a decent return on your investment. Directors of limited companies can take a share of the company’s profits — such as those generated through rent — in dividends.

Though dividends are taxed differently from other income (such as that taken directly in rent), directors must still pay tax on it in addition to the corporation tax paid by the company. At the current rate, the first £2,000 of dividends you earn are tax-free. After this figure, dividends are taxed at the following rates:

• Basic rate: 7.5 per cent
• Higher rate: 32.5%
• Additional rate: 38.1%

You can work out which category you fall into by adding your income from dividends to your income from other sources.

If you are looking to transfer ownership of your property portfolio to a limited company structure and need to finance the transition, our free-to-use Finance Hub can help you to access dozens of competitively priced buy-to-let products tailored to your specific needs. Simply fill out a quick questionnaire and begin browsing the best products to help you achieve your investment goals.

Article by Annie Caley-Renn

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