Updating post from Reddit.
My elderly parents have 2 mortgage free properties that I fully manage for them. Total rent is £1570pm. Both parents are standard rate tax payers.
Would there be any benefit in setting up a Ltd Co and transferring the houses to it?
No - you’d need to pay stamp duty and the costs of transferring will be thousands. Buying in a Ltd can be beneficial but not when you already own the property.
Would disagree. It depends how long you hold them for and your tax band.
If you're paying 40 to 45% on the rental income, you'll make the costs back within two years
Nobody is making 40-45% within 2 years 🤣 you have corp tax on the property then costs of accountant and maintenance then if you are handsoff it's 16.5% monthly agency fees. Then you have risk of nonpaying tenant or them trashing the place. Also if you already own the property in your name and transfering it to a ltd company which you are part of then don't forget CGT is due there isn't relief for it being main residence being transferred in this way. Stamp duty and don't forget you can't sell under market rate to your ltd company. Now buying the first btl property in which you don't own might be better to start off but anything mortgaged will just push any profits into losses.
You've misread.
If someone is paying for 40 to 45% TAX on gross rental income. At no point was I saying you had a 40% yeild 😀
And yes that estimate of time to pay back costs to transfer is inclusive of the fact that you cannot sell under value. Likewise it also takes into account you still have tax liability on rental income after interest. In the example in front of me, which isn't optimised at all, around 3 years to make the costs back. Given you can optimise a lot more as an Ltd, you can make additional savings after tax on interest
Obviously every circumstance is different. But the comment was more to highlight a blanket statement that it is not cost effective, which a lot of people say, isn't always right. And definitely worth investigating before making any plans
Sometimes it can be.
For example, when I slit with my ex I had a tenant in situ. Long story short, I rented whilst I bought.
The SDLT savings on not paying the higher rate on my new home was enough to cover all the costs of the transfer of the rental into a LTD. Plus I now have favourable tax treatment (or I should say "normal" tax treatment).
I believe because you have to sell the properties to the Ltd company you will have to pay stamp duty on the purchase. They’ll also have to pay CGT on the sale. You’ll have to do the sums but I’m guessing this will negate any benefits.
Exactly this
More info is needed, specifically the value of both properties and what the IHT impact will be when your parents pass away. You also need to consider if you want to hold on to these properties for more than 10 years.
I have moved three mortgage free properties into a LTD over the last decade, 2 in 2017 and one in july this year. The properties are previous homes and the first two I started renting out in 2013.
In 2017 I became a higher rate tax payer so my strategy was to move the mortgage free properties over to a LTD and release about 45% equity via a BTL mortgage to cover the sale costs including both SDLT and CGT then use the rest to pay off my personal mortgage. The income from the LTD should be used to pay my wife a low salary or make director pension contributions so I would pay 0% tax. There was no plan for me to receive income or dividends from the LTD.
I did basic financial projections of keeping the properties private vs moving to the LTD over 5, 10 and 15 years all things being equal. The projection indicated that moving the properties was right for me, I rechecked after 5 years and it the actual numbers showed it was even more finanical better moving the properties than I projected. Paying off my personal mortgage is what put it over the line even considering low interest rates.
I did the same projections this year and came to the same decision moving our old home that we were renting out privately to the BTL even though I was able to reduce the income tax through a deed of transfer of beneficial interest to my SAHM wife.
If you set up the ltd with you and your parents as directors the biggest cost will be the SDLT, your parents will have a largish CGT bill. You can find a solicitor to handle both parties and you can split the costs between your parents and the LTD.
After the sale the properties should no longer be subject to IHT although the gains they receive from the sale will be, IHT was not part of my strategy so you need to check that with an accountant.
If you do not have a dedicated BTL accountant who can advise you on this I can recommend mine via DM who I found via the NLRA, they have done my company accounts since I set up the LTD but I have also used them to confirm CGT amounts as well as advised on payroll when it as worth doing
If you are going to inherit the properties in the future, it might be worth thinking about transferring it to a limited company at that point as there will be no capital gains tax but other taxes like stamp duty and legal fees will still apply.
Transfer into a LLP for tax efficiency, you just need a partner.