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.
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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