Does it make sense for an overseas non resident buyer to purchase a property in the UK through a limited company?

Introduction

Invesmore has a community of investors on a WhatsApp group.  The community is mostly overseas investors interested in buying in the UK.  One of the questions which came up was; ” is it better to buy UK property as an individual or through a limited company if you are a non-resident landlord?

intuitively you might say it makes more sense to buy a property through a limited company, but it turns out this is only sensible if you are a UK based higher rate taxpayer who can obtain competitively low interest rates for limited company buy to let mortgages.  For overseas buyers with out UK passports, limited company mortgages are prohibitively expensive.

To save a great deal of reading, my overall conclusion is: for overseas buyers without UK passports, it makes more sense to purchase buy to let properties as an individual if the net worth of your property portfolio is less than £325,000*

* read through the post for full explanations.

To research this topic properly, I broke the whole ownership process into logical segments.

Inheritance tax

Inheritance tax: limited company ownership

In theory a limited company is a good vehicle for avoiding inheritance tax. If you have a working business that qualifies for business relief inheritance tax, that business can be passed onto the next generation without attracting inheritance tax liability. The catch is…

The UK government say:

“You can’t claim Business Relief if the company mainly deals with land or buildings, or in making or holding investments”

Ref: https://www.gov.uk/business-relief-inheritance-tax/what-qualifies-for-business-relief

Therefore you could say a buy to let property is a building that is used for investment purposes.

ASCL solicitors say: “If you’re renting out properties for income, you’ve got a business as far as HMRC is concerned. But whilst trading business can usually be passed on to the next generation without incurring Inheritance Tax, that’s most definitely not the case for buy-to-let. Trading businesses are up to 100% exempt from Inheritance because of Business Property Relief. But buy-to-let portfolios are classed as “investment businesses” by HMRC, so the relief simply isn’t available.”

Ref: https://www.acsl.org.uk/seven-inheritance-tax-tips-for-buy-to-let-investors

Therefore a buy to let UK Ltd company is not necessarily a viable way to sidestep inheritance tax liability.

And if you want to transfer shares to other parties i.e. children, you then get exposed to STLD, capital gains and numerous other costs. This forum thread explains; https://www.propertytribes.com/gifting-btl-shares-to-children-t-127633432.html

One option is to incorporate a company with children as shareholders from date of incorporation and organise the share structure so it suits your purposes.  In effect you reduce the transference of wealth and reduce tax liability.

Ref: https://www.thetimes.co.uk/money-mentor/article/gifting-property-tax-implications/

Inheritance tax: individual ownership

If you’re a Non-UK resident for tax purposes and your estate is worth more than £325,000 after all liabilities have been paid, then you would have to pay 40% inheritance tax on any sum above that figure.

For most investors who have interest only buy to let mortgages, it means their portfolio would have to be worth over £1,000,000 assuming they are borrowing at around 70% loan to value.

Very few people will have a portfolio that large. Therefore there is no inheritance tax liability for the vast majority of private owners.

There is one other wildcard: Foreign company ownership. If an offshore company has ownership of property and there is an internal share transfer within the business, tax would have to be paid according to the rules where the company is domiciled.  In other words, if you’re in a very low tax jurisdiction, you may be able to transfer wealth very efficiently.

Ref: http://www.saplaw.co.uk/uk-legal-services/commercial-lawyers-london/commercial-lawyers-articles/using-an-offshore-company-to-buy-and-sell-uk-residential-property

My conclusions on inheritance tax and buy to let:

If your personal estate in the UK is worth less than £325,000, there is no inheritance tax… Therefore it’s a non-issue.

If you gift a buy to let property before you pass away, you’re exposed to potential capital gains tax.  Since you’re not selling the property, you won’t necessarily have ready cash to pay the capital gains tax bill.  That can affect cash flow.  Ref: https://taxscouts.com/capital-gains-tax-on-gifted-property/

Overall, from an inheritance tax point of view it’s probably better to own property as an individual and then gift it through inheritance assuming your UK based net wealth is less than £325,000.

For the vast majority of buy to let owners, you’ll be exposed to far less tax if you bequest property through inheritance.

Inheritance tax conclusion ratings:

• 10/10 in favour of inheritance tax liability as non-resident individual.
• 5/10 in favour inheritance tax liability as a UK Ltd company with non-resident shareholders

Capital gains

Capital gains: limited company ownership

Your limited company usually pays corporation tax on the profit (‘chargeable gain’) from selling or disposing of an asset. Assets are things your company owns, such as: Land and property.

At the moment corporation tax is 19%  Ref: https://www.gov.uk/corporation-tax-rates

If you dispose of assets, pay 19% corporation tax, you’ll then draw down dividends.

If you are a UK resident, you will have to pay tax on those dividends which are taxed at 7.5% up to £50,000 dividend income per year per year. Therefore your effective tax rate is approximately 26.5% on capital gain disposals.

And if you draw down more than £50,000 in dividend income per year, you would have to pay 32.5% dividend tax, meaning you would have an effective tax rate of 51.5%!

Fortunately, if you are a non-resident you are not subject to tax on dividends!

Capital gains: individuals

If you are a non-resident individual in ownership of a buy to let property, you’ll fall under non-resident capital gains (NRCGT).

Ref: https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-uk-residential-property

“Non-residents realising chargeable gains post 5 April 2019 will be taxed as follows:

The rates of CGT are 18% or 28% for individuals (depending on UK income)

• 18% for your entire Capital Gains profit from property if your overall annual UK income is below £50,000
• 28% for your entire Capital Gains profit from property if your overall annual UK income is above the £50,000 threshold”

Ref: https://www.gov.uk/guidance/capital-gains-tax-rates-and-allowances

For an overseas investor, if you have an after-tax income in the UK of less than £50,000, your capital gains would be taxed at 18%.

If you are a buy to let landlord, typical after-tax income would be £1,000 to £5000 per year, so your portfolio would have to be 10-20 properties in order to fall into a higher tax bracket and go above 18% capital gains tax.

Ref: https://www.gov.uk/tax-uk-income-live-abroad

My capital gains tax conclusion:

The problem with capital gains tax on property is that you’re taxed on the nominal growth in value on a property.  For example, if you bought a house for £100,000 and you sell the same property for £150,000 in 10 years time. And let’s assume we have 10 years of high inflation at an average of 4% per year.

In real inflation adjusted terms, the property will not have gone up in value.  Yet, you will have to pay capital gains tax at either 18% for an individual or 19% through a limited company.  In either case, the true asset value of your property will diminish by 6% in real terms because of capital gains taxation.

My conclusion on capital gains: It makes no real difference whether you purchase through a limited company or as an individual.

Capital gains conclusion ratings:

• 10/10 in favour of a buy to let mortgage as non-resident individual.
• 9/10 in favour of a buy to let mortgage as a UK Ltd company with non-resident shareholders

Mortgage rates

If a buyer i.e. the main shareholders do not hold a UK passport, there are very few lenders who will provide limited company buy to let mortgages.

Limited company buy to let mortgage rates for non UK passport holders

Below is a table of mortgage lending costs a limited company purchaser of a buy to let property where the shareholder does not have a UK passport:

Caveat: I’ve been asked not to disclose the specific lender by our mortgage advisers. This table is only indicative and should not be relied upon.  Please get specific mortgage advice tailored to your needs. Rates last updated 01 June 2021

Typically limited company buy to let mortgages are 25% higher than buy to let mortgages for individuals.

For a buy to let property, if bought through a limited company, the lender demands that rental income covers 125% of mortgage repayments.

Since interest rates for limited companies are high, if they demanded a 140% rent stress test, very few deals would make financial sense.

Mortgages: individual

For an individual looking to borrow at

• 75% loan to value, they might expect to pay around 3.74% interest rate. There are processing fees, in this case fees are £3000
• 65% loan to value: there are variable rates of 2.99%, or fixed rates of 3.05% for two years. The mortgage fee would be 1% sum borrowed and you would have to pay for the survey.

A typical rent stress test for personal buy to let mortgages will range from 125% to 145%.  As always stress tests vary from one lender to another.

Conclusion on mortgages

If you have a UK passport, you will have far more lending options.  However, for most overseas buyers, they won’t have a UK passport and therefore mortgage finance options are relatively limited.

If you add in another dimension: limited company mortgages for buy to let for people without UK passports, it narrows your options down to only one or two lenders that we know of.

In theory a limited company structure makes more financial sense, because you can offset interest costs against expenses

For an individual, they are subject to non-residents landlord scheme, which is 20% of rental income minus expenses, but no relief for interest costs. And in theory if mortgage interest rates were the same for limited companies versus individuals, it would make more sense to buy through a limited company.

However, as you see from these figures, limited company interest costs are so much higher, that overall you will make more after tax revenue from personal ownership.

Mortgage conclusion ratings:

• 10/10 in favour of a buy to let mortgage as non-resident individual.
• 6/10 in favour of a buy to let mortgage as a UK Ltd company with non-resident shareholder

Income tax

Income tax: limited company

If you have a limited company , you can offset all business expenses against income. This includes mortgage interest. When you arrive at a net profit figure, you then have to pay corporation tax at 19%.

After corporation tax is paid, you can extract dividends. If you are non-resident, you do not pay tax on dividends, because this is classified as ‘Disregarded income’ by HMRC. Therefore you pay 19% corporation tax on profits.

If you’re a UK resident, then you would pay an extra 7.5% tax on the first £27,000 of dividend earnings you draw down.

Corporation tax and income tax. Offsetting purchase expenses:  Unfortunately, you can’t offset professional fees incurred in the purchase of a property against rental income. But you can offset mortgage  set up costs against income since it’s not classed as a part of your capital expenditure.

HMRC say: ”Expenses incurred before rental business begins

A customer may incur expenses for the purposes of a rental business before that business starts. If so, they may be able to claim a deduction for them once the letting begins (ITTOIA05/S57 or CTA09/S61). Relief is only due under these special rules where the expenditure:

• is incurred within a period of seven years before the date the rental business is started, and
• is not otherwise allowable as a deduction for tax purposes, and
• would have been allowed as a deduction if it had been incurred after the rental business started.

This means that, to be allowable, the expenditure must be incurred wholly and exclusively for the purposes of the rental business and must not be capital expenditure (see PIM1900 onwards)”

Aside: Directors loans to your limited company

Without going into the topic in any real depth, there is no real net benefit in charging interest to your limited company for funds you’ve used to capitalise the business in order to buy a property.

If you don’t charge your limited company interest, you make extra profit which is subject to 19% corporation tax.  If you do charge your limited company money, that is subject to 20% income tax on all interest paid to you.  Net result it’s probably not worth charging your company interest on money you have loaned it.

Ref:

• https://www.gov.uk/directors-loans/you-lend-your-company-money
• https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates/beneficial-loan-arrangements-hmrc-official-rates
• https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim2505
• https://propertyhub.net/forum/topic/15428-acquisition-fees-as-an-allowable-expense-in-a-limited-company/
• https://www.optimiseaccountants.co.uk/knwbase/what-are-the-property-allowable-costs-to-reduce-my-tax/

Income tax: individual

If you’re an overseas individual, you are exposed to the non-residents landlord tax scheme (NRLS), which amounts to 20% of all rental income minus all expenses except for interest costs.

Since interest costs are usually 50% or more of total buy to let expenses, this is a significant problem.

There is one major benefit to NRLS; you pay 20% tax irrespective of rental income.  If you were a UK resident with an income of over £50,000 per year, you would be taxed at 40% of all profits above £50,000. Therefore the higher your rental income from UK real estate, proportionately the less tax you pay relative to UK resident investors.

We have a sophisticated deal calculator which factors in interest rates, expenses, taxation. It’s helpful when working out the viability of a deal.

Calculation results assuming interest rates are the same for a limited company and an individual.Important: Mortgages in limited companies are typically 25% higher than for mortgages in the name of an individual.

For this article, I assumed two scenarios: purchase as an individual or purchase as a limited company.  Variables included:

• Property price: £140,000
• Rent: £750 per month
• 75% loan to value
• Corporation tax at 19%
• Non-resident landlord scheme tax at 20% (minus all expenses except mortgage interest)

If interest rates with the same for limited companies and individual borrowers:

• Limited company ownership: 3.75% interest rates. Annual net profit after tax: £1969
• Individual ownership: 3.75% interest rates. Annual net profit after tax: £1334

If interest rates are ‘real world’ i.e. limited company interest rates 25% higher on average than interest rates for individuals:

• Limited company ownership: 4.7% interest rates. Annual net profit after tax: £1161
• Individual ownership: 3.75% interest rates. Annual net profit after tax: £1398

Income tax conclusion

Based on my research, if interest rates were the same for limited companies and individual investors, it would make more sense to purchase a property through a limited company since you can offset all interest costs against tax.

However, interest costs for buy to let limited companies are typically 25% higher than interest costs for an individual.

In my opinion, for an overseas investor if you combine the lower interest rates for individuals and the simplicity of the non residents landlord scheme, I believe it’s better to own a buy to let investment as an individual.

Finally!

Income tax conclusion ratings:

• 10/10 in favour of ownership as non-resident individual.
• 7/10 in favour of ownership as a UK Ltd company

Inheritance tax: Unless you have a large portfolio, it makes more sense to own a property as an individual and pass it on through inheritance, versus share distribution through a limited company. Inheritance tax conclusion ratings:

• 10/10 in favour of inheritance tax liability as non-resident individual.
• 5/10 in favour inheritance tax liability as a UK Ltd company with non-resident shareholders

Capital gains tax: unless you make more than £50,000 income from your UK interests, you will pay less tax as an individual then you will through a limited company. Capital gains conclusion ratings: Capital gains conclusion ratings:

• 10/10 in favour of a buy to let mortgage as non-resident individual.
• 9/10 in favour of a buy to let mortgage as a UK Ltd company with non-resident shareholders

Income tax: as an individual non-resident landlord, you pay a simple 20% of rent minus some expenses.  With a limited company, you’re effectively double taxed because you pay corporation tax and then tax on dividends which means your effective tax rate is around 26.5%. Income tax conclusion ratings:

• 10/10 in favour of ownership as non-resident individual.
• 7/10 in favour of ownership as a UK Ltd company

Mortgages: it makes more sense to take on a mortgage as an individual because you achieve far lower interest rates. Conclusion ratings:

• 10/10 in favour of a buy to let mortgage as non-resident individual.
• 7/10 in favour of a buy to let mortgage as a UK Ltd company with non-resident shareholders

Cash flow: factoring in cost of interest, you are better off owning a property as an individual because you will have lower borrowing costs. Conclusion ratings:

• 10/10 in favour of ownership as non-resident individual.
• 7/10 in favour of ownership as a UK Ltd company with non-resident shareholders

Administration: Limited company administration is way more complex than non-resident landlord scheme.  With more admin comes more stress and more professional costs, which have to be paid for.  Conclusion ratings:

• 10/10 in favour of ownership as non-resident individual.
• 6/10 in favour of ownership as a UK Ltd company with non-resident shareholders

In aggregate, in my opinion based on my research so far, it makes more sense for non-resident landlords to buy property as an individual assuming they are likely to have a portfolio which produces less than £50,000 per year in total post-tax income.

My final overall conclusion rating for a non-resident landlord with a portfolio with a net value of less than £325,000:

• 10/10 in favour of ownership as non-resident individual.
• 7/10 in favour of ownership as a UK Ltd company with non-resident shareholders

Caveat: By no means am I knowledgeable on tax.  I’ve spent some time researching the topic and it’s very likely I will change various statements in this document as I learn more.

It’s also been a helpful research exercise ahead of a podcast we are doing with a tax expert.  In that podcast we hope to answer all these questions fully.

Useful resources:

• HMRC capital gains tax calculator https://www.gov.uk/guidance/capital-gains-tax-for-non-residents-calculating-taxable-gain-or-loss
• Very good article explaining the taxation differences between private ownership and corporate ownership https://www.rossmartin.co.uk/land-a-property/1588-buy-to-let-ownership-personal-or-company

Forums:

• https://community.hmrc.gov.uk/forums/customerforums/
• https://www.propertytribes.com/categories.php
• https://www.propertyforum.com/forum/
• https://forums.landlordzone.co.uk/
• https://propertyhub.net/forum/