Simple answer is, it depends.
Despite property prices going up, and the government doing steps such as the Stamp Duty Land Tax charge on second property, investment property is still a hot topic for those deciding this is the investment strategy for them.
So why do people hold investment properties in a limited company? And why do others hold them personally? There are so many things to think about but the advantages of holding these in a company are as follows:
Limited liability – This means using a company means that the risk is limited to the amount invested in the company, giving you peace of mind.
More reliefs are available as a company – one relevant for if you have a property business is Land remediation relief (LRR) this gives additional tax deduction when the company incurs qualifying land remediation expenditure
Flexibility – using a limited company can mean you can involve your family members or others. Using a company also gives some flexibility as to when amounts are taxed. For example, profits could be extracted in years when other income is lower, making use of allowances that could otherwise be lost.
Perception – many people prefer to deal with a limited company as opposed to an individual, believing a company is likely to be an established business with more resources. So it can give you the gravitas that you need to help pack a punch.
Potential tax savings – the profit from a rental business is charged to income tax if held personally. Although you can alter the proportions they are taxed in if you hold this with a spouse, and this should be something you consider. Whereas, holding the property in a company would mean that the profits would be taxed via corporation tax in the hands of a company. Corporation tax is currently at 19% (note we do know that this will increase to 25% see here) and individuals at higher rate will be taxed at 40%. Additionally, profits are calculated on a different basis, for example, tax relief for borrowing costs for residential properties is restricted for individuals, but not for companies.
For many property businesses, using a company may result in less tax being paid on the profits of the business. This means more after-tax funds to invest in the business and increased profits going forward.
So, assuming Louis owns a property and receives £20,000 of rent, and he has interest of £10,000, comparing whether he is a basic rate, higher rate, additional rate taxpayer, or if he holds the property in a company you can see how much he receives after tax:
This is based on the fact that Louis wants to reinvest his profits into more property.
However, if he needs to take some funds out of the business, then this adds an extra layer to consider, and brings us into one of the disadvantages of holding property in a company – which is the double taxation problem.
If Louis put the property in the Company, he would pay corporation tax on the profits from the property business. Should he wish to then take dividends out of the business, he would take these out of after-corporation tax profits, assuming he wants to take all the money out as a dividend the following amounts could be received, depending on again what rate of tax he was paid at.
So we know the advantages and how much tax we’ll pay, what are the other disadvantages if holding property in a company?
We can’t report your property income on a cash basis (i.e. as you receive and pay things out) as a company, it has to be done an accruals basis. And there is additional compliance, that whilst a personal landlord needs to file a Self-Assessment Tax Return, a company must also produce a set of accounts and a corporation tax return, you will also have duties as a director, and these should be taken seriously.
It may cause some issues regarding loans secured on the property. Loans to companies can be at a higher rate, then what you can obtain personally. It is likely that existing arrangements (e.g., tenancy agreements, insurance) will need to be updated. Again, this could come at a cost.
The tax landscape never stops changing either, so whilst it is more beneficial from a tax perspective at the moment, this may change in the future, tax shouldn’t wag the dog and should be part of the decision not the only decision.
Finally, the annual tax on enveloped dwellings (ATED) applies where a dwelling with a value of £500,000 or more is owned by a company. Relief is provided for let properties, but this must be claimed.
I already own an investment property can I move my properties?
If you already own a property or properties, then we can look to incorporate the trade you currently have and put this into a limited company. Incorporation could be a good fit, reducing tax bills, however it is not for all, and many would be better served continuing as they are.
This will largely depend on a few things.
Whether rental profits are at higher or additional rates of tax, the property you own is subject to a mortgage, not all after-tax funds are needed by you, and you are a good record-keeper, or you’re happy to pay for someone to do it for you.
If the property was brought recently, or the gain on the property isn’t expected to be high, or you’re more involved than a single simple buy-to-let.
This may also get rid of one of the disadvantages, as you are in effect selling your property to the company at its market value, this would be sat in a director’s loan account and you would be able to draw on this free of income tax, and so dividends may not be needed for the first few years anyway, although please consider mortgage requirements etc in the future.
Note: this should not be taken as an alternative to advice, everyone is different and different treatment will apply depending on your personal situation, including your residency, how much you earn, and also different treatment for letting our commercial property and furnished holiday lets. If you want a calculation based on your situation, or tailored advice, please get in touch with our Bev.
*These figures have been completed based on England, Wales or NI, however Scottish rates do differ, please get in touch for these amended rates.