Investment companies and buy to let investors

Should you have an investment company?

When making an investment it is sometimes beneficial to do so via a company, particularly where the investment pays an income. This is because the tax rates on income for companies can be much lower than the rates which can apply to individuals. These rates are compared below:

Individual (top rates) Company
Interest 45% 19%
Dividends 38.1% 0%
Rental profits 45% 19%

If you have already made your investments, they will need to be transferred to the company. Or, in the case of certain shares or securities, sold and purchased via the company from the open market.

Consideration will, of course, need to be given to any tax liabilities arising and how they might be mitigated.

Buy-to-let (BTL) investors

We are seeing increasing numbers of BTL investors incorporating their existing portfolio. This has undoubtedly been fuelled by the restriction to tax relief for loan interest of unincorporated BTL investors.

However, this is only part of the story and we have the found the following additional benefits and opportunities are also driving more BTL investors in this direction:

  • Incorporation can in some cases be carried out without triggering a liability to Capital Gains Tax (CGT) or Stamp Duty Land Tax (SDLT)
  • There may be an uplift in the base cost of the properties to current market in the company, in effect “washing out” the capital gains made to date
  • The company can make pension contributions for the owner who in many cases also a director of the company. The company should benefit from corporation tax relief
  • Investors who increase their borrowing before incorporation can, by loaning the additional borrowed funds to the new company to invest, withdraw those funds at late date without an income tax liability
  • A broader range of inheritance tax planning options may be available for the investor who will now own shares in the new company instead of the properties
  • Some lenders will allow a transfer of the liability to the new company (but note in practice this may involve consolidating existing lending with one provider)

As a consequence of the above, we expect to see more BTL investors considering an investment company for their portfolio.

It is very important to take specialist advice before taking any action. If you would like to know more please contact our Tax Services team on 01293 227670.