Why buy-to-let incorporation might not be the best option
Buy-to-let incorporation was hailed as the saviour of landlords across the country after the April changes to buy-to-let tax relief. However, a number of potential pitfalls have already been raised, so will buy-to-let incorporation be as financially advantageous as first thought?
What are the potential pitfalls of buy-to-let incorporation?
Buy-to-let incorporation isn’t without its risks. A number of potential legal and tax-related concerns have already been raised about this model, including:
Initial costs
One of the main concerns when incorporating a buy-to-let portfolio is the cost of administration and potentially losing a favourable mortgage rate.
Setting up a limited company in and of itself needn’t be a great expense; landlords can do this for just over £10 on the Companies House website.
However, landlords must also rearrange mortgages as a limited company, rather than as an individual. This is likely to mean losing out on favourable mortgage rates, although it will turn the property into a business expense.
Buy-to-let landlords may also incur costs on the following processes as part of the transition:
- Establishment of uprated memorandum and articles
- Drawing up of shareholders’ agreement
- Updating wills
- Arranging power of attorney for the company, as well as personal property and financial affairs
- Broker/lender fees for mortgaging/remortgaging
- Conveyancing, rewriting/renegotiating tenancy, management agreements, relicensing legal costs
It’s recommended that landlords take on a specialist buy-to-let landlord accountant to help oversee this transition.
Double taxation
In September, experts warned that conventional buy-to-let incorporation risked landlords being taxed twice.
Buy-to-let landlords who intend to build up money within the plc are unlikely to be affected. However, buy-to-let landlords wanting to live off income as it’s accrued would be charged for taking money out of the company.
If this figure is classified as a salary, National Insurance contributions may also come into play, which could result in a tax rate of up to 50% on distributed rental income.
Tax avoidance accusations
A number of buy-to-let landlords have already attempted to keep hold of favourable mortgage rates using a somewhat controversial manoeuvre.
Approximately 40 buy-to-let landlords have already used the ‘beneficial interest company trust’ technique which claims to enable landlords to incorporate their portfolio without needing to remortgage.
This would enable landlords to avoid the buy-to-let changes that came in in April, as the rules only apply to properties owned by individuals.
An attempted judicial review orchestrated by Cherie Booth QC failed back in September. However, a number of senior legal professionals have been quick to point out the potential failings of this option.
The Income Tax Act bars individuals transferring a source of income into a company for tax purposes. Landlords using this technique might therefore be accused of tax avoidance and face allegations of mortgage fraud if HMRC finds proof that the action was taken for tax reasons.
Call on 3 Wise Bears and keep up to date with the latest accountancy advice for buy-to-let landlords.
