Limited company tax strategy could backfire, says expert

Putting buy-to-let properties into a limited company to avoid paying higher rates of income tax could backfire and result in double taxation, according to a senior tax adviser.

Speaking at the Association of Short Term Lenders annual conference last week, Smith & Williamson tax partner Nick Cartwright warned that there was a potential double layer of tax, as landlords may be taxed both in the company and on the extraction of their money.

“The overall tax rate, if rental income is distributed, could be as much as 50% with current rates,” he said, adding that incorporation works better with a “roll-up” strategy.

“Incorporation is good if you want to build up money within the company, but not if you want to live off the income as it is earned,” said Cartwright. The landlord would be taxed on taking money out of the company and, where taken as a salary, could also be liable for National Insurance contributions, which would be payable both by the employer company and the director or employee.

While there are clearly some benefits to holding buy-to-let properties in a limited company the ASTL said it is essential that the landlord receives proper tax advice.

Regulation will soon change again following the Prudential Regulatory Authority’s (PRA’s) consultation on underwriting standards for buy-to-let mortgage contracts. If adopted, it will require affordability tests, regardless of whether the borrower is an individual or limited company. This requirement currently only applies to firms subject to PRA regulations, such as banks.

Also speaking at the conference, Savills director Susan Emmett warned that taxation changes in the buy-to-let market could have unintended consequences. “Fewer buy-to-lets mean more competition for rental properties, resulting in rising rents, making it yet harder for potential first time buyers to save for a deposit,” she said.

Emmett added that there has been a slow-down in enquiries from investor buyers but that some of these may now be looking in areas of lower cost housing. “The problem is that if you are an investor there aren’t that many options out there and the property market is still the best option.”

However, she warned: “this goes against what the Government wants, as landlords will be competing more strongly with the first time buyers in these areas.”