Date posted: 23rd Jul 2024
Many potential landlords that we speak to, are considering using a limited company to hold property investments.
This is due to a multitude of reasons such as:
- The interest restriction for landlords letting residential property on long lets.
- The proposed abolition of the favourable furnished holiday letting rules.
- The lower rates of corporation tax compared to income tax.
- The personal rental income causing loss of child benefit.
- The personal rental income causing the loss of personal allowances.
- The personal rental creating issues with pension tapering rules
Like most things, there are pros and cons to personal v corporate ownership.
Advantages
As for any company, a property company has its own legal identity separate from those who own and run it. It also benefits from limited liability, which adds a layer of protection for the director-shareholders unless they have given any personal guarantees.
From a tax perspective, rental profits are charged to corporation tax rather than to income tax. Depending on the level of the company’s profits, this will be at a rate of between 19% and 25% (unless the company is a close investment holding company.) As the corporation tax rates are lower than the income tax rates for the same levels of taxable income, the tax charge on rental profits will often be lower.
The restrictions on interest relief for residential lets do not apply to property companies. Consequently, interest and finance costs can be deducted in full in calculating the rental profits, even where they relate to long-term residential lets. Further, such a deduction is permitted even where it results in or increases a loss. For individuals letting residential property on long lets, relief for interest and finance costs is given as a basic rate reduction from the tax due on the rental profits, and where the costs cannot be relieved in this way, they are carried forward for relief in later years.
Where a gain is made on the sale of a property by a company, it is charged to corporation tax rather than capital gains tax. This may result in a lower bill if the company’s corporation tax rate is less than 24%, but the property would be taxable on an individual at the higher residential rate of capital gains tax.
Disadvantages
The main disadvantage of operating a letting business through a company is that the profits need to be extracted if they are to be used outside the company. This is likely to trigger further tax bills. Consequently, it is not enough to look at the company in isolation – any tax and National Insurance payable on profits extracted from the company must also be taken into account.
Unlike an individual, a company does not benefit from a personal allowance, and will pay corporation tax on the first £1 of taxable profit. By contrast, individuals with adjusted net income of less than £125,140 will receive a personal allowance of up to £12,570.
Likewise, individuals benefit from an annual exempt amount for capital gains tax; something not available to a company. However, with the reduction in the annual exempt amount to £3,000 for 2024/25, this is less of a benefit than in the past.
Further charges can apply if a landlord wishes to move property owned individually into the company. Where an existing business is incorporated, SDLT will be payable again. As the company is connected to the landlord, this will be based on the market value of the property, and for a residential property, it will be payable at the additional property rates.
Transferring the property to a company may also trigger a capital gains tax bill on the landlord personally, again based on the market value of the property. However, where the landlord receives shares in exchange for the business, incorporation relief may be available (in limited circumstances), deferring the gain until the shares are sold. If the property company is set up from scratch and the property is bought by the company, this will avoid a double SDLT charge; although if the property is a residential property, the 3% supplement will apply, even if the company only owns one property.
Finally, if you are looking to borrow funds, you should be aware that it is usually costlier to borrow in a limited company than it is personally. So what you save in tax may be eroded or eclipsed by mortgage interest charges.
Do the sums
The extent to which operating a rental business through a company is beneficial will depend on personal circumstances and whether the intention is to extract profits or to leave them in the company to fund further property purchases. There is no substitute for doing the sums.
We are well versed in property taxation, so would be delighted to help you. Please contact our expert team here.
