How to Transfer or Buy a Holiday Let Through a Limited Company
Following the Government’s March 2024 announcement on removing the Furnished Holiday Letting (FHL) rules, there is a growing trend towards holiday let investors looking to transfer or buy a holiday let via a limited company.
This article provides an overview of the steps involved in purchasing or transferring a holiday let into a limited company structure in the UK. We’ll be highlighting the potential benefits compared to owning as an individual as well as some challenges you may face.
What is a limited company?
A limited company can either be owned by shareholders or guarantors. As a separate legal entity, it offers protection for individuals involved, as it separates personal assets from business assets.
Benefits of owning a holiday let through a limited company
Mortgage interest relief
Changes due in April 2025 mean that owners will no longer be able to offset their mortgage interest on holiday lets held in their name against profit.
Holiday lets owned by a limited company can offset the mortgage interest. Depending on the rate of interest and the mortgage, this can be a large amount so reducing the profit will in turn reduce the corporation tax due.
Favourable tax rate
Owning a holiday let through a limited company means the company pays 19% corporation tax on profits (based on a taxable profit of £50,000 or less), compared to individuals who pay higher personal tax rates, ranging from 20% to 45%.
You choose when to draw income
With the option to use dividends to draw profits from the company, tax liabilities can be controlled more efficiently. You determine the level of tax paid and when it will be due for payment to HMRC. Where you operate your holiday let in your personal name, you have no choice but to declare profits in the tax year they are generated.
VAT
If you own, or plan to own, more than one holiday let, you are allowed to own each property in a separate company, and each company has its own annual £85,000 turnover threshold for VAT. This means that you may not need to register to pay VAT, even if the combined income exceeds £85,000 over the year.
Business rates relief
If more than one property is owned, and in separate limited companies, you can take advantage of small business rates relief, as each business will be entitled to utilise the £12,000 threshold.
Reduced stamp duty land tax (SDLT) rate
When you buy a holiday let property as an individual, you pay the regular rate of SDLT (depending on the property value band), as well as a 5% surcharge (as of 31st October 2024, but remaining as 4% in Wales and 6% in Scotland). — with no access to the potential benefit of a reduced SDLT rate for any future buyer of your property.
If you originally acquired your property via a limited company, when selling it, the buyer opts to purchase the company rather than just the property, the SDLT rate will be reduced to 0.5%. This represents a significant saving for the buyer, allowing you to negotiate a better price.
Inheritance planning
Owning a holiday let as a limited company allows you to manage inheritance and tax planning. You can gift shares in the company to, for example, your children; affording you more flexibility and fewer complications than if you were to try and give part or all of your holiday property to someone, when owned in your name.
Reinvest in more properties
If you have ambitions of owning several holiday lets, you can keep the profits in the company to purchase more properties. This can be advantageous, especially for those who are in the 40%+ income tax bracket and don’t want to increase their personal tax liabilities further.
Reduced risk
Limited companies operate as separate legal entities, meaning the liabilities of the company do not extend to its shareholders. This means your personal assets, such as your home and finances are protected.
Disadvantages of owning a holiday let through a limited company
Costs
The costs of forming and running a limited company are more than owning a holiday let in your own name. You’ve got to incorporate the company which involves various fees.
On an ongoing basis, you’ll also have to keep records and submit the required paperwork, such as an annual confirmation statement, statutory accounts, and your company tax return. All these documents can be produced with support from an accountant, but this is yet another cost to factor in, as is the cost of any other professional services you may need to use.
Mortgage rates
Mortgage interest rates and fees are normally higher for a company loan than equivalent mortgages on properties held in a personal name. This is because the process is a little more complex and you have far less choice when it comes to finding a lender.
Therefore, whilst you can offset your mortgage interest against profits, the actual amount of mortgage interest you pay compared to owning a holiday let in your personal name is an important consideration.
The responsibilities of running a company
There are many legal and regulatory aspects to comply with when you choose to set up as a limited company. There’s a requirement to maintain and submit annual accounts, confirmation statements, corporation tax computations and corporation tax returns. The administrative work can be time-consuming, complex and somewhat a burden.
No capital gains allowance
While individuals selling their holiday let can claim an annual exemption amount of £3,000 against chargeable capital gains, there is no capital gains allowance for those operating their holiday let business as a limited company.
No personal allowance
Individuals benefit from a personal allowance of £12,570 (if taxable income is under £125,140), which means that income up to this amount is tax-free. This does not apply to limited companies.
Double taxation of income
If you take profit out of the limited company by paying yourself a salary or a dividend, you pay income tax on the amount and the company pays corporation tax on the profits. This situation is known as double taxation.
How to buy a holiday let directly through a limited company
Buying a holiday let directly through a limited company in the UK involves some similar steps to the transfer method, but also some new considerations:
Set up your limited company
- Register your limited company with Companies House. This can be done online or through an accountant.
- Be sure to check that the company’s articles of association allow ‘property ownership and letting’ as part of its business activities.
- Open a business bank account. This will be used for the company’s financial transactions, including purchasing the property.
Secure financing
- Determine your budget. Decide how much your limited company can afford to spend on the property; factoring in purchase price, taxes, and other costs.
- Next, apply for a mortgage. Approach lenders that offer commercial or holiday let mortgages to limited companies. Provide financial details, including your business plan and projected rental income.
- Be prepared to provide a personal guarantee for the mortgage, as many lenders require this for company purchases.
Appoint professionals
- Hire a solicitor with expertise in commercial property transactions to handle the legal aspects of the purchase.
- Consult an accountant to understand the tax implications and ensure the purchase aligns with your company’s financial strategy.
How to transfer an existing holiday let into a limited company
If you already own a holiday let and wish to form a limited company to transfer it to, you are legally selling the property ‘from yourself’ to ‘your limited company’. Therefore, a capital gains tax will potentially be owed, as well as other costs to complete the transfer. It will also be subject to SDLT.
Set up your limited company
- Register your limited company with Companies House. This can be done online or through an accountant.
- Check that the company’s articles of association allow ‘property ownership and letting’ as part of its business activities.
- Open a business bank account. This will be used for the company’s financial transactions, including purchasing the property.
Transfer ownership of the property
- The holiday let property must be sold to the limited company. This involves a formal conveyancing process, similar to a private property sale.
- Hire a solicitor experienced in property transactions to handle the legal aspects of the transfer.
Pay the SDLT and any capital gains tax due
- The limited company will be required to pay SDLT on the purchase price of the property if the value of the property is above £40,000. If the property has an outstanding mortgage, SDLT will apply to the value of the mortgage being transferred.
- A capital gains tax liability may be triggered if the property’s value has increased since you purchased it. Consult a tax advisor to calculate and manage this potential tax obligation.
Notify the existing mortgage lender
- If the property has an existing mortgage, notify your lender about the transfer. You may need to repay the existing mortgage and arrange a new commercial mortgage in the name of the limited company.
Update your tax and legal documents
- Inform HMRC of the change in ownership for tax purposes; i.e. your limited company will now be responsible for filing corporation tax returns.
- Update any necessary licenses, insurance policies, and utility accounts to reflect ‘the company’ as the new property owner.
To summarise
Owning a holiday let property via a limited company can offer several benefits, especially for higher-rate taxpayers and those planning on building a property portfolio. However, for a basic-rate taxpayer, with plans for only one holiday property, it can be more tax efficient and less work to own the holiday let in their own name.
Given the complexities involved, consulting with a tax professionals and legal advisors is always advised to ensure that you complete any holiday let purchase or transferral successfully.
Please note: This information is published for information only and offers no advice. We encourage you to conduct your own research and seek professional advice from legal, financial, and tax professionals before making any decisions on buying or transferring a holiday let.