Thinking of moving your buy-to-let properties into a limited company? That could prove expensive

Moving a buy-to-let property into a limited company to avoid tax might seem appealing at first glance. But, as Merryn Somerset Webb, explains, George Osborne has plans to tax that heavily, too.


George Osborne has buy-to-let in his sights

A quick point to make on buy-to-let. There is a chance that George Osborne will relent and reinstate the tax relief on mortgage interest payments on investment properties. I suspect he won't see my post here. But what do you do if he doesn't, and paying your new tax bill on rental income makes your investment look like a bad one?

One answer, as suggested by The Times this week and the Mail a few weeks ago, is to move it into a limited company. That way you can offset the interest and also pay corporation tax (which will be 18% by 2020) rather than income tax.

However, there are huge problems with this. The first is capital gains tax. If you move a house into a company, it will be deemed a disposal for capital gains purposes and you will have to pay CGT (at 18% or 28%) on any gains made since you bought the property. There will be stamp duty to pay on the transfer too. That could all be expensive.

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You'll also have to complete annual returns and accounts an admin complication you might not want. Then, if you want access to the cash you do make, you will have to take it out as dividends and pay tax on that. That's fine if you are getting under £5,000 there is to be a tax-free dividend allowance from next year. But after that, you'll pay 7.5% if you are a basic rate tax payer, 32.5% if you are on the higher rate and 38.1% if you are an additional rate payer.

Most of these things have been noted by buy-to-let commentators. But there is one more thing to worry about if you set up a company one that hasn't been so often mentioned. It is ATED', the Annual Tax on Enveloped Dwellings. This is charged on properties above a certain value held inside companies. And it isn't cheap.

If you have a £20m house, it is £218,200 a year (with the payment index-linked). If you have one worth £2m-£5m it is £23,350, and if it is £1m-£2m it is £7,000. That's real money.

You might be thinking by now that you have no need to worry after all, how many people have buy-to-lets worth £1m plus? But you do need to worry.

From 2016, ATED is to be charged at £3,500 on houses worth more than £500,000. And there is no reason for it to stop there. By 2020, when George Osborne's removal of interest tax relief is complete, it could easily be £150,000. Still want to move your buy-to-let into a company?

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.