Investors are looking at transferring their investment portfolios into limited companies as a way of negating the new tax restrictions introduced by HMRC.

There is no simple answer to establish if this is a good thing to do as every investors situation is different. Any investor considering such a move should talk to their accountant regarding the tax issues and possibly their wealth manager as there are often implications that could impact on inheritance further down the line.

Advantages of using a limited company

  • Tax on mortgage interest payments – between 2017 to 2020 tax relief on mortgage interest will be progressively cut from 45% to 20% for higher rate taxpayers. As Limited Companies pay corporation tax only on their gross profit margin the tax payable on property held by a limited company will usually be lower than if they were held by an individual investor.
  • Tax on dividends – from April 2016 a new tax-free dividend allowance of was introduced which has now been reduced to £2000. This means that company directors can receive that amount free of tax on any dividends they take from the company.
  • Withdrawal of personal funds – where directors have invested their own capital into the company they can withdraw it without a tax penalty.
  • Joint ownership – limited companies allow individuals to own property as a collective rather than as two or more individuals owning it jointly.

Disadvantages of using a limited company

  • Capital gains tax – when the company sells a property its value is simply added as income to the company bank account and any declared profit will be subject to corporation tax. As capital gains tax does not apply to limited companies the tax free allowance they carry would not be applicable.
  • Running cost of limited company – The following functions and costs are likely to apply to a limited company.
    • preparation of accounts
    • filing annual returns at Companies House
    • legal fees
    • accountancy fees
    • Having a registered office
  • Reduced choice of lenders – Obtaining finance may be more difficult as fewer lenders will lend to limited companies and their product ranges will be more limited.

SPV limited company

SPV stands for special purpose vehicle and it is essentially a limited company which has been set up for the sole purpose of handling investment property. It is not allowed to become involved in any other activities in the way normal limited companies would. This is the preferred type of limited company that most property investors would form and are favoured by mortgage lenders.

Transfer of investment property from an Individual to a limited company

It is important to consider the tax considerations when transferring existing properties from an individual name into a Limited Company structure. Capital gains tax and stamp duty land tax (SDLT) may be payable by the individual on transfer and this may outweigh any benefit.