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When you are thinking of buying a holiday let, a big consideration is who should actually purchase the holiday home and whose name it should be under.
Therefore, we brought in the experts from R.T. Marke & Co Limited to help explain any pros and cons attached to these options. *
Should I buy through a limited company or under my own name?
This is a question we are asked all the time, and the answer is: it depends on your particular circumstances.
Many people seem to want to buy their holiday let through a limited company but this is not usually the best solution for your first property.
As always, you need to seek expert advice as every situation is different, and it’s vital to understand the facts before making any decisions.
Most buyers tell us they feel they must buy via a limited company in order to offset any mortgage interest, but this is not true. Unlike long term lets or buy to lets, qualifying furnished holiday lets get 100% relief for mortgage interest, and there is no limit on the amount of mortgage interest you can claim.
So why would you want to use a limited company to purchase a holiday let?
The main reason is tax planning:
Tax rates
If you buy a holiday let through a limited company, then the profit it makes will stay in that limited company until you take it out by way of a wage or a dividend. As the company currently only pays 19% corporation tax on its profits, you can restrict your tax rate to 19% by not extracting any money from the company, which is, of course, very popular for higher rate taxpayers who would otherwise pay 40% or more on the net rental if they were trading as a sole trader or partnership.
Dividends
When you want to extract money from the company, you can do so by a combination of a small wage and a dividend. Dividends currently have a favourable tax level of 0% for the first £2k, then 7.5% for basic taxpayers and 32.5% for higher rate taxpayers.
Timing
Clearly, if you can determine when you take a wage or dividend from your limited company, you can determine when, and at what rate, you pay personal tax. This can be particularly useful if your own income fluctuates or is likely to reduce, as timing can enable you to manage your tax liabilities to be at the lowest levels possible. Where you operate your holiday let in your personal name, on the other hand, you have no choice but to declare your full profits for that year in your tax return.
VAT
If you have more than one property, you can own each property in a separate company and then each company has its own annual £85k turnover threshold for VAT. This is likely to mean that by using a company to own each property you do not need to register for VAT even though the combined turnover exceeds £85k.
Business rates
If you have more than one property, you can own each property in a separate company and then each company has its own £12k threshold for small business rates relief. This is likely to mean that, with careful planning, by using a company to own each property you will not pay business rates.
Stamp Duty (SDLT)
When you buy a holiday let property, you pay the normal scaled level of SDLT, and also usually the 3% surcharge. If you did originally purchase your property via a limited company, when you come to dispose of the property, if the purchaser buys your company rather than just the property, the SDLT rate is only 0.5% which is a huge saving for the new owner and should enable you to negotiate a share of that benefit for yourself.
Succession issues
If you purchase the property as a limited company, you can gift shares in your company to your children which is potentially more flexible than gifting a part of a property you own in your own name.
Risk reduction
Trading as a limited company adds another layer of risk reduction by distancing the business activity from your own personal home and savings.
What are the negatives of buying my holiday let property through a limited company?
The main issues are:
Costs
The costs of forming and running a business as a company are more than running as a sole trader.
Mortgage costs
Interest rates are normally higher for a company loan than a personal loan.
Tax
For a basic rate taxpayer, with only one holiday property, it will be more tax efficient to buy the property in their own name.
Own use
If the director wishes to use the holiday property for their own holidays, there will be a tax charge if full market rent isn't paid.
So, how do I form a limited company?
In short, if you decide to buy a holiday let property, you should take advice from a specialist accountant before you make any decisions, and certainly before you exchange contracts, as there are many pitfalls for the unwary, and many tax-saving opportunities for the experts to point out to you, and mistakes can be very costly.
A limited company is a separate legal entity, from the owners (shareholders) and is run by the directors, but you only need one person. It has its own bank account and files annual accounts and corporation tax returns with HMRC.
Any money you introduce into the company, say to help fund the purchase or set up costs, is treated as a director's loan and can be withdrawn later without any tax liability.
What about buying the property in my own name, but trading as a limited company?
This hybrid model has several advantages as you can own the asset in your name but shelter the income inside a limited company and also benefit from risk reduction and many of the other advantages listed above.
You have the option of charging a rent to the company but, again, specialist advice from your accountant is needed as there are advantages and disadvantages in this complex model and a holistic approach is needed.
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* This material is published for information only and offers no advice, it provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
This article was supplied by R.T. Marke & Co Limited and holidaycottages.co.uk cannot accept any liability for the content.