Articles

HOW TO SET UP A LIMITED COMPANY FOR BUY TO LET?

by Benny Gala DNS Accountants

WHAT IS A BUY TO LET?

Buy to let is a British phrase which means purchase of a property for letting out and earning through it. 

Buy to let property is a property acquired for the purpose of earning profit by letting it out. Investment in buy to let has gained popularity among the investors as it provides an easy way of earning income and also provides them with a possibility of hike in their income with the rise in rates of letting out.

Many people in UK are earning their livelihood from it up till now.

CHANGE IN BUY TO LET POLICY

The recent reforms in the buy to let investments have shaken the investors.  Formerly, they could offset their total mortgage interest (100%) against their profits before paying the tax. But from now onwards this 100% tax relief will be reduced to 75% of the mortgage interest this year, 50% in the next year, 25% in 2019 and 0% in 2020. There is also an increase in the stamp duty.

ILLUSTRATION

Suppose A’s income is £9000 from buy to let and the

extra cost involved is £2000

mortgage interest is £3000

tax paid is 20%

YEARS

2016 (100%)

2017 (75%)

2018 (50%)

2019(25%)

2020(0%)

INCOME

9000

9000

9000

9000

9000

(COST)

(2000)

(2000)

(2000)

(2000)

(2000)

NET INCOME

7000

7000

7000

7000

7000

(INTEREST)

(3000)(100%)

(2250)(75%)

(1500)(50%)

(750) (25%)

(0) (0%)

 

4000

4750

5500

6250

7000

TAX

(800)

(950)

(1100)

(1250)

(1400)

 

3200

3800

4400

5000

5600

(INTEREST)

(0)

(750) (25%)

(1500)(50%)

(2250)(75%)

(3000) (100%)

PROFIT

3200

3050

2900

2750

2600

In the above example we can see that the profit is decreasing with the increase in tax liability every year and tax relief is also decreasing.

EFFECTS OF THE CHANGE

Such amendment has burdened the individual investors with more tax, more stamp duty and minimal profit. The investment which was once a boon for the investors has now become a bane.

Now, perturbed investors are contemplating about the various alternatives to shirk off their tax burden. One such lucrative option that has seized their attention is investing in a buy to let through a limited company.

ADVANTAGES OF INVESTING THROUGH A LIMITED COMPANY

Potential investors see a number of benefits arising out of investment in a buy to let as a limited company.

The various advantages they could see are:-

1.Tax payable through a limited company will be much less than what is charged to an individual investor.

2.Tax free dividend allowance of £5000 is granted.

3.No tax is charged for reinvesting the profits for acquiring further properties.

4.Any personal fund if invested as director’s loan into the limited company can be withdrawn.

5.The profits earned will be liable to corporation tax which is 19% for profits below £300,000, which is lower as compared to income tax of 40%.

6.Change of ownership of a company is lot easier than sale of a property in case of an individual investment.

REASONS FOR SETTING UP OF A LIMITED COMPANY

Individual investors are opting for incorporation of their business as a limited company. Since a company has a separate legal entity which means it has a separate existence from the owners constituting it. This feature allows the company to enter into transactions in its own name and make the company liable for its actions. The liability of the owner remains limited.

PROCEDURES OF SETTING UP OF A BUY TO LET COMPANY

SELECTION OF A NAME

1. An appropriate name should be chosen and submitted to the Companies House (regulatory body for registration of limited companies).

2. The selected name should not be same or similar to the name of an existing company.

3. The name of the company should always end with the word ‘limited’ or ‘Ltd’.

4. The selected name should not be inappropriate, misleading or connected with any government or local authority unless permitted by them.

SETTING UP OF A REGISTERED OFFICE

1. A registered office should be set up for necessary official communication.

2. The registered office must be located in UK.

FILING OF DOCUMENTS

Certain documents to be filed with Companies House are:

1.MEMORANDUM OF ASSOCIATION

It is the charter of the company beyond which a company cannot act. It regulates the external activity of the company.

It states the name of the company, name and signature of the subscribers forming the company, number of shares held by them, location of the company, its objectives, its authorized share capital and liability of the company.

2.ARTICLE OF ASSOCIATION

It is a document which defines the duties and responsibilities of the directors and its members. It acts as an instruction manual for the company.

3.FORM IN01

It contains the details of the company, its officers, its statement of capital, its statement of guarantee and compliance.

REGISTRATION

Registration of a limited company has now become an effortless process. Registration of limited companies is done by Companies House, which is a regulatory body for registration of all limited companies. Registration can be done by the individual himself or through an accountant or by a company formation agent who registers the company online at a click of a button.

GRANT OF CERTIFICATE OF INCORPORATION

After being satisfied that everything has been complied with in regard to incorporation of companies, Companies House will issue a certificate of incorporation which acts as a proof of its existence. 

REGISTRATION FOR CORPORATE TAX

1 .A company should register for corporate tax within 3 months of its operation.

2. For online registration 10 digits Unique Tax Reference (UTR) given by HM Revenue and Custom (HMRC) after incorporation has to be entered.

3. While registration following information has to be furnished to HM Revenue and Custom (HMRC)

-Company’s registration number

-Date of commencement of business

-Annual accounts up to the last date.

4. After furnishing the above information and payment of Corporation Tax, Company Tax Return has to be filed.

RESPONSIBILITIES OF A LIMITED COMPANY AFTER INCORPORATION

1. Company’s annual accounts must be filed with Companies House at the end of every year.

2. A confirmation statement in the form of AR01 must be submitted every year with the latest information regarding the company.

3. Any profit or annual income must be furnished to HMRC on annual basis.

4. Any liability must be paid off within 9 months of the company’s year end.

5. Every employee of the company should pay income tax.

IS SETTING UP OF A LIMITED COMPANY FOR BUY TO LET A GOOD DECISION?

Seeking protection under the umbrella of incorporation does not completely safeguard the potential investors. They have to pay a price for it. The drawbacks related to the formation of limited companies are 

1. DISCLOSURE

Companies have to disclose every information related to their business like the profits, salaries given, margins and so on. All of these informations could be used by the competitors. Disclosure process is usually lengthy and time consuming.

2. AVAILIBLITY OF MORTGAGE

Very few mortgage providers lend to a company so this could leave the company with a very limited option for availability of funds. Money is the most important element of any business without which a business cannot prosper.

3. HIGH MORTGAGE RATES

Most of the lenders charge high mortgage rates and fees for lending from limited companies than from individual investors.

4. NO CAPITAL GAIN TAX (CGT) ALLOWANCE WHEN THE COMPANY SELLS THE PROPERTY

When the company sells the property acquired by it, it would not be given the benefit of capital gain tax allowance which would be given to individual investors.

5. OVERHEADS

There are number of additional costs involved while setting up and running a limited company like filing fees, legal fees, cost involved in auditing, payment made to various agents, corporation tax and so on which increases the overall cost.

6. COMPLEXITIES IN TRANSFERRING PROPERTIES

Transferring existing investment properties from the name of an individual to a limited company is an arduous task than purchasing new properties. Such a process would attract both Capital Gain Tax and Stamp Duty Land Tax (SDLT).

 


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About Benny Gala Senior   DNS Accountants

156 connections, 4 recommendations, 640 honor points.
Joined APSense since, June 30th, 2017, From Harrow, United Kingdom.

Created on Jul 11th 2018 01:01. Viewed 257 times.

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