When to Set up a Limited Company When Investing in Property

With​ ​all​ ​the​ ​latest​ ​changes​ ​in​ ​the​ ​BTL​ ​market​ ​it​ ​is​ ​often​ ​muted​ ​that​ ​it​ ​would​ ​be​ ​better​ ​as​ ​a landlord​ ​to​ ​set​ ​up​ ​a​ ​limited​ ​company​ ​as​ ​these​ ​structures​ ​are​ ​not​ ​affected​ ​by​ ​the​ ​changes. The​ ​changes​ ​we​ ​refer​ ​to​ ​are​ ​the​ ​implementation​ ​of​ ​a​ ​Stamp​ ​duty​ ​surcharge​ ​of​ ​3%​ ​over​ ​and above​ ​the​ ​standard​ ​rate​ ​and​ ​a​ ​phasing​ ​out​ ​by​ ​2020​ ​of​ ​the​ ​tax​ ​relief​ ​on​ ​mortgage​ ​interest​ ​on BTL​ ​mortgages.​ ​This​ ​has​ ​led​ ​to​ ​a​ ​slight​ ​cooling​ ​off​ ​in​ ​the​ ​​ ​BTL​ ​property​ ​market​ ​and​ ​led​ ​some to​ ​believe​ ​that​ ​it​ ​may​ ​be​ ​better​ ​to​ ​switch​ ​their​ ​portfolios​ ​into​ ​that​ ​of​ ​a​ ​ltd​ ​company.

Firstly​, ​remember​ ​that​ ​when​ ​borrowing​ ​through​ ​a​ ​company​ ​structure,​ ​mortgage​ ​companies will​ ​charge​ ​at​ ​a​ ​higher​ ​rate​ ​than​ ​they​ ​would​ ​for​ ​an​ ​individual.

​Secondly​ ​there​ ​are​ ​other​ ​costs​ ​attached​ ​to​ ​running​ ​a​ ​ltd​ ​company​ ​that​ ​go​ ​beyond​ ​just​ ​the setting​ ​up​ ​of​ ​said​ ​firm,​ ​which​ ​in​ ​fact​ ​can​ ​be​ ​relatively​ ​inexpensive.​ ​The​ ​costs​ ​I​ ​refer​ ​to​ ​here are​ ​the​ ​completing​ ​of​ ​annual​ ​accounts,​ ​which​ ​in​ ​many​ ​cases​ ​require​ ​you​ ​to​ ​hire​ ​the​ ​services of​ ​an​ ​accountant.​ ​Despite​ ​these​ ​extra​ ​costs​ ​the​ ​main​ ​inhibitor​ ​is​ ​the​ ​cost​ ​of​ ​borrowing,​ ​where I​ ​have​ ​mentioned​ ​before​ ​the​ ​cost​ ​to​ ​a​ ​company​ ​of​ ​borrowing​ ​in​ ​the​ ​market​ ​outstrips​ ​by​ ​some margin​ ​the​ ​cost​ ​incurred​ ​by​ ​an​ ​individual.
So​ ​some​ ​may​ ​ask,​ ​when​ ​is​ ​it​ ​appropriate​ ​to​ ​switch​ ​to​ ​a​ ​ltd​ ​company​ ​to​ ​buy​ ​property.​ ​It​ ​has been​ ​calculated​ ​that​ ​a​ ​higher​ ​rate​ ​taxpayer​ ​needs​ ​to​ ​own​ ​around​ ​4​ ​properties​ ​before​ ​it becomes​ ​cost​ ​effective​ ​to​ ​buy​ ​them​ ​through​ ​a​ ​ltd​ ​company​ ​structure.
​​So​ ​if​ ​I​ ​own​ ​that​ ​many​ ​is​ ​it​ ​cost​ ​effective​ ​to​ ​switch​ ​to​ ​a​ ​company?​ ​Unfortunately,​ ​whether​ ​you only​ ​own​ ​one​ ​buy-to-let​ ​property​ ​or​ ​have​ ​a​ ​large​ ​portfolio​ ​as​ ​an​ ​individual,​ ​selling​ ​the properties​ ​and​ ​then​ ​“repurchasing”​ ​them​ ​within​ ​a​ ​limited​ ​company​ ​is​ ​unlikely​ ​to​ ​work​ ​out​ ​for you.

To​ ​transfer​ ​the​ ​properties​ ​from​ ​your​ ​own​ ​name​ ​to​ ​a​ ​company​ ​you​ ​will​ ​have​ ​to​ ​sell​ ​them, incurring​ ​potential​ ​capital​ ​gains​ ​tax.​ ​Stamp​ ​duty​ ​is​ ​likely​ ​to​ ​be​ ​payable​ ​when​ ​you​ ​re-purchase inside​ ​a​ ​business.​ ​This​ ​makes​ ​this​ ​method​ ​unfeasible​ ​for​ ​someone​ ​with​ ​a​ ​small​ ​number​ ​of properties.​ ​Research​ ​has​ ​shown​ ​that​ ​even​ ​those​ ​with​ ​a​ ​large​ ​portfolio​ ​are​ ​better​ ​off​ ​staying put​ ​as​ ​the​ ​cost​ ​of​ ​transferring​ ​far​ ​outweighs​ ​any​ ​gains.

So​ ​the​ ​answer​ ​to​ ​this​ ​question​ ​is,​ ​if​ ​you​ ​intend​ ​to​ ​build​ ​a​ ​large​ ​portfolio​ ​of​ ​properties,​ ​and​ ​are prepared​ ​to​ ​suffer​ ​the​ ​higher​ ​costs​ ​associated​ ​with​ ​this​ ​then​ ​setting​ ​up​ ​a​ ​limited​ ​(ltd) company​ ​from the​ ​get​ ​go​ ​is​ ​key.​ ​If​ ​however,​ ​you​ ​already​ ​have​ ​an​ ​established​ ​portfolio,​ ​whether​ ​large​ ​or​ ​not, it​ ​is​ ​better​ ​to​ ​leave​ ​alone​ ​and​ ​continue​ ​under​ ​the​ ​structure.

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