Holding residential property in a limited company can definitely help lower the tax bill of some individuals, but the benefits mainly apply to higher rate taxpayers. Owning property in a company can also make it easier to pass on investments to children or grandchildren; however, buying property through a limited company can also work out to be disadvantageous mainly for basic-rate taxpayers. These ifs and buts are why it’s always advisable to seek expert advice before making decisions of this sort.
Anyone thinking of transferring investment property they already own to a limited company should be cautious as this can work out as a costly exercise resulting in expensive legal and accountancy bills, a less good mortgage deal, and Capital Gains and Stamp Duty Land Tax (SDLT) on the transfer.
For basic rate taxpayers it’s probably more advantageous to keep investment property in personal ownership and to pay personal income tax on profits through self-assessment, taking advantage of all the allowable expenses and allowances that apply.
For higher rate taxpayers there are definite advantages to owning property in the company. Even though there are extra expenses involved with doing this, which is the stand out reason why this strategy is not recommended for basic rate taxpayers, anyone with rental income of 40k in total, who will certainly easily jump into the higher income bracket, should definitely consider a limited company portfolio.
In this scenario the company will pay corporation tax at 20% (tapering between now and 2020 to 18%), providing the income from the property is less than £300,000 p.a. In addition, tax relief on mortgage interest will still apply for property in the company, but stamp duty (SDLT) still applies for both personal and corporate investors. Another aspect of company ownership worth noting is that residential property worth more than £500,000 bought in the company is liable for a 15% SDLT charge unless the owner can demonstrate that the property will be let out commercially to third parties. Annual Tax on Enveloped Dwellings may also apply.
There are advantages and disadvantages of holding property in a limited company and this boils down to which tax band the investor belongs in and whether she or he is a higher rate taxpayer. Definitely, avoiding 45% tax if you’re a higher rate taxpayer must be a priority, but no one should just assume that buying property through a limited company structure is always the best way to go, and anyone looking to do so should seek advice from an accountant expert in small business accounting and tax planning.