Can I Sell My House to My Limited Company?

If you’re a landlord, you might have heard that – these days – it’s often better to own a property within a limited company structure rather than in your personal name.

As a result, you may well be thinking of selling your house to a limited company to take advantage of the benefits and keep your property business affairs tax efficient.

Whilst this is indeed a viable option for most landlords, there are a few complications. 

In this article, the team at Property Solvers runs through why you’d consider using a Limited company entity as the property “owner”, how the process works, pros + cons alongside the relevant tax considerations.

Why Do Property Owners Sell to a Limited Company?

Section 24 of the Finance Act 2015 (also known as the “Tenant Tax”) stopped landlords who own properties in their names from using their mortgage payments as a tax deduction. Instead, the legislation means landlords must pay income tax on everything they earn from their properties, with no opportunity to deduct interest payments.

Landlords still, however, have access to a credit of 20% meaning that the new rules are a huge blow to higher-rate taxpayers, who can now claim back far less than previously.

Although the majority will not be affected, some basic-rate taxpayers are unable to subtract mortgage payments from their earnings – pushing them into a higher tax bracket.

Creating a limited company and selling the ownership of the house to this entity offers a workaround due to different tax rules (more on this shortly).

The government gradually passed this legislation between 2017 and 2021. Its rollout finished in April 2020.

We have a handy Section 24 calculator if you’re interested in knowing exactly how the law affects you and how much tax you can expect to pay.

Understand Your Tax Position When Selling Property to a Limited Company

As mentioned, when you sell your property to a limited company, you won’t have to pay income tax. Instead, the government will tax you differently.

It’s crucial to remember that this is a sale and not a transfer – meaning that you’ll incur the same costs as when you buy and sell a house in the “normal” way.

Since there are a few taxes and costs to consider here, discussing your situation with a qualified tax advisor or accountant is always a good idea. 

Selling Your House to a Limited Company – Understand the Processes

Selling your property to your limited company is a very similar process to selling and buying a house at the same time as an individual. However, there are some differences. 

Pros of Selling Your House to a Limited Company

Selling a property to your limited company often makes sense due to the advantages listed below. 

Tax Savings

The most obvious benefit of selling your property to a limited company is the potential for tax relief. For many higher-rate taxpayers with properties in individual names, the savings are significant.

Business Growth

Yet this isn’t just about saving money in the short term. Buying as a limited property also allows you to grow your business further as you can re-invest the money into growing a larger property portfolio.

Indeed, unless Section 24 gets reversed, selling to a limited company is the best and most efficient way to operate as a private landlord.

Transfers to Family Members

A more niche benefit of selling your house as a limited company is the ability to appoint your family members as shareholders and directors in the business. This can be beneficial for inheritance tax purposes.

Limited Liability

Any problems you experience as a landlord won’t affect you as an individual. If something goes wrong with your property business, it won’t hammer your credit score or risk you losing all your savings.

Creating a Director’s Loan Account

When selling a property to your limited company at its current market value, it’s possible to create a Director’s Loan Account. Although you will have to deduct the mortgage balance, it’s possible to repay the loan back to yourself tax free.

You can also use other savings you may have as deposits to buy further properties in the Limited company and redeem them later as a director’s loan.

Less Stress Testing

The mortgage application process is slightly different for limited companies, and it can work in your favor. Sometimes, lenders require less income when companies take out a mortgage.

Cons of Selling Your House to a Limited Company

However, there are also disadvantages, and many landlords decide that using a limited company isn’t the right choice for them.

Additional Costs

Even though the main benefit of selling your property to a limited company is saving money, there are some additional costs to consider. Legal fees can be expensive enough when you only have to buy or sell a house – when you do both at once, the finance costs add up even more.

Plus, you’ll face the standard costs of running a limited company.  You’ll have to file annual company accounts, resulting in additional accountancy and bookkeeping fees.

Don’t forget, as mentioned above, you also have to pay capital gains, stamp duty land tax and other costs that can add up fast.

Harder to Extract Profits

Although you will have direct access to accumulated capital, remember that funds that you take out of your limited company will be subject to a dividend tax.  This varies according to the tax bracket you lie within.

Higher Interest Rates

Although income requirements can be lenient, you may face higher mortgage interest rates when you buy as a limited company rather than as an individual.

On the plus side, this problem isn’t as big as it once was – particularly relative to the huge tax burden when owning rental properties in one’s own name.

Potential to Lose the Property

Although buying a house as a company means you won’t lose all your personal savings if something goes wrong, it also means the property itself will be tied up in the company. If the company goes under, you could lose the house.

At the same time, however, your personal credit rating is protected say – for example, if your tenants do not pay or you fall behind with bills owed by the company.

Difficulties Obtaining a Loan

While director’s loans can be advantageous, many limited company mortgage lenders only want to lend to people using the house as an investment. You may struggle to obtain a loan if you’re going to use it as a residential property.

Other times, the mortgage may get declined due to inexperience or inability to provide enough security (or collateral).

Remember that living in a property as your main residence that’s financed by a Limited company buy-to-let (commercial) mortgage is likely to be a breach of the lender’s terms and conditions.

Some lenders may also not want to lend to a company with no trading history or completely stay away from lending to buy-to-let property companies. Note that you cannot port your personal buy-to-let mortgage to a limited company mortgage.

Bridging Loan Costs

If you are unable to pay cash for the property to sale to your limited company, and need to take a bridging loan, you will incur comparatively high interest costs alongside a range of other fees.

Should You Sell Your Property to a Limited Company? The Choice is Yours…

Deciding whether to sell your property to a limited company depends on your situation.  Ultimately, it comes down to engaging in some form of cost-benefit analysis which will help you weigh up your options.

If you own a number of properties in your personal name, it may be worth swallowing the extra taxes and associated costs – especially if you plan to keep your portfolio for the long term.

On the other hand, it can make sense to sell some or all of the properties to clear down the overall level of secured debt.  Some buy to let landlords, for example, sell and then purchase new properties in a limited company structure.

If you decide to go ahead with this latter option, Property Solvers offer fast cash purchase, auction and estate agency options.  Contact us 24/7!