HOW TO SET UP A LIMITED COMPANY FOR BUY TO LET?
by Benny Gala DNS AccountantsWHAT 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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Created on Jul 11th 2018 01:01. Viewed 647 times.