Company or Individual – How should I hold my property?
Let’s explore the advantages and disadvantages of owning a property as an individual or own limited company or corporate entity. Colin Davison, editor of Property Tax Secret’s explores the various considerations that need to be bought into account before you take up the decision as to whether you buying it under a company or individuals name.
I get this asked a lot – from property investors, is it better to hold their property your own name, or whether it is better in a corporate entity. From a tax perspective, there are various factors to consider in reaching the decision and, as with most things, there are benefits to either option to each.
Quick rule of thumb
Currently we see personal tax rates with personal allowances and income tax rates at 20 and 40/45%, when the company the rate is only 19%.
With the current CGT and income tax rates, there is a lower tax in a corporate entity over an individual, however, these rates are subject to change and it will not suit everybody to be in a limited company as I would explain in this article.
Stamp duty land tax
Stamp duty land tax (SDLT) is payable on the buying of a freeholder or payment for a long leasehold. The rate of SDLT depends on the purchase price or lease premium. Where this is not more than £500,000 the rate of SDLT payable is the same regardless of whether the property is purchased by an individual or a company.
Stamp Duty Premiums for expensive limited company assets
However, from 20 March 2014, where the consideration is more than £500,000, a higher SDLT rate applies where the property is purchased by a company. lion.
The table below compares the SDLT rates for residential property purchased by individuals with that payable on residential property purchased by a company.
|Purchase price/lease premium||Own name buyer SDLT rate|
|Up to £125,000||Zero||Zero|
|Above £125,000 and up to £250,000||1||1|
|Above £250,000 and up to £500,000||3||3|
|Above £500,000 and up to £1 million||4||15|
|Over £1 million up to £2 million||5||15|
|Over £2 million||7||15|
So as you can see from the table there is a substantial increase in the stamp duty payable for amounts over 500,000 pounds. It’s therefore vital that we all ensure that the purchase premiums paid on stamp duty which would be even higher for overseas buyers, it’s carefully taken into consideration in the purchase decision.
Annual tax on enveloped dwellings
The annual tax on enveloped dwellings (ATED) acts as a further disincentive to holding expensive residential property in a company. The charge, which is an annual charge, currently applies to UK-residential property valued at more than £2 million owned by a company (or certain other non-natural entities), and is set at £15,000 for properties worth more than £2 million but not more than £5 million, rising in steps to £140,000 for properties valued at more than £20 million.
If investing in residential property of £500,000 or more, the impact of the ATED should therefore not be overlooked when considering whether to hold the property in a limited company.
The rules for working out taxable profits are essentially the same regardless of whether the property is owned an individual or by a company. However, where the property rental business is carried on by an individual, those profits are charged to income tax at the taxpayer’s marginal rate. If the rental business is carried on by a company, the profits are charged to corporation tax. Where those profits are subsequently extracted from the company, depending on the method of extracting and the recipient’s personal tax situation, there may be personal tax to pay on the extracted profits, in addition to any corporation tax payable on the rental profits.
Whether it is more tax-efficient for the rental income to be earned by a company or an individual will depend on the circumstances. The following examples illustrate different scenarios.
Case Study– Christopher buys vs Christopher Property Assets Limited (basic rate taxpayer) vs. company
Christopher owns three properties in his own name in East London which he lets out. In 2020/21 he makes a rental profit of £25,000. He has no other income.
The profits of his rental business are charged to income tax. The first £12,500 is covered by his personal allowance, leaving taxable income of £12,500 on which Christopher must pay tax of £2,500 (£12,500 @ 20%).
If the properties had been owned by his company Christopher Property Assets Limited, the company would have had to pay corporation tax of £5,000 (£25,000 @ 20%).
In this case, the availability of Andrew’s personal allowance means that the tax bill is lower if the properties are owned by him personally rather than by a limited company.
Case Study – Cieran (higher rate taxpayer) vs. Cieran Environmental Services Limited
Cieran also makes a rental profit in 2020/21 of £25,000 from his residential letting business in Reading. He also earns a salary of £70,000 a year from his environmental management job.
If the properties are owned by Cieran personally, he will pay income tax on the rental income of £10,000 (£25,000 @ 40%). However, if the properties are held by his limited company, Cieran Property Solutions Limited, he would pay corporation tax of £5,000 (£25,000 @ 20%) on the rental income.
If he does not need to extract the profits and can leave them in the company, the immediate tax bill on the rental income is much lower if the properties are owned by a limited company rather than Cieran personally.
However, if Cieran does need the rental income and extracts the post-tax profits of £20,000 (rental profit of £25,000, less corporation tax of £5,000) by way of a dividend, he will pay further tax of £5,000 on the dividend. The same tax is therefore payable if Cieran owns the property himself, or if they are owned by a company and the post-tax profits are extracted the same year as a dividend.
Tax Planning tip
If the individual is a higher or additional rate taxpayer, the tax bill will be lower if the properties are held in a company and the retained profits are not distributed.
It would be wise to ensure that where the properties are held in a company all the normal considerations and tax planning matters are explored to avoid paying more than is needed.
Capital gains tax
Chargeable gains made by an individual are liable to Capital Gains Tax (CGT). For a company, however, these gains are charged to corporation tax. CGT is payable at the rate of 18% to the extent that taxable income and chargeable gains do not exceed the basic rate band, and at 28% thereafter.
Where a company pays corporation tax at the small profits rate, corporate gains are taxed at 19%. However, it should be noted that special rules apply to gains on high value residential properties subject to the ATED, in respect of which gains are taxed at 28%.
Individuals benefit from an annual exemption (£12,300 for 2020/21). The ability to transfer assets between spouses or civil partners at a value giving rise to neither a gain nor a loss potentially allows a couple to realise tax-free gains of £24,600 in 2020/21. There is no annual exemption for companies, although companies still benefit from an allowance for inflation (i.e. indexation allowance).
The impact of other reliefs, such as CGT lettings relief for individuals (if applicable), will also need to be taken into account.
Again, the best position will vary on each individual. If the annual exemption is available and the taxpayer is a basic rate taxpayer, the tax on the gain paid by the individual will be lower than that paid by a company. However, if the annual exemption has already been used and the taxpayer is a higher or additional rate taxpayer, the opposite may be true, particularly if inflationary gains are high.
The decision whether to own a residential property portfolio individually or in a limited company will depend on the circumstances. Don’t get caught out with higher interest charges. As we say in tax, don’t let the tax tail should not wag the dog, and non-tax considerations may override the tax implications, particularly as regards the optimal funding of the purchase.
If you would like practical help to enable you to have ownership in your own name and then get lower interest payments, this would be beneficial We will then recommend the use of a Deed of trust to hold the property in.
Professional tax advice should be sought prior to making the purchase to ensure that all relevant factors are considered in advance.
For more tax advice and assistance with accounts and to speak to Colin Davison, Managing Partner at Cranleys. 01256 830000