Property investment has become a common venture in the UK, with many investors using limited companies as investment vehicles. While the considerations of buying property through a limited company may appear complex, understanding the tax implications can make a significant difference in the profitability of the investment. Investors, you can enjoy various tax advantages and potentially higher returns if you know how to navigate the tax landscape. Property has always been seen as a stable investment, but the tax implications can significantly affect your potential returns.
Buying Property through a Limited Company: An Overview
When a property is bought through a limited company, it becomes an asset of the company. This separates the property from your personal assets, which could protect you from personal liability. Limited companies provide a level of protection to investors that isn’t available with personal property ownership. If a tenant or anyone else files a claim against the property, only the assets within the company could potentially be used to settle the claim. Your personal assets would typically be safe.
But where do taxes come into play? A limited company pays corporate tax on its profits, while an individual pays income tax on their rental income. The rates of these taxes vary, and the difference can significantly impact your profits.
The Taxation of Property Income in a Limited Company
Unlike individuals, who pay income tax on their rental income, companies pay corporation tax. This is a key distinction because the corporation tax rate is typically lower than the higher income tax rates. As of now, the corporation tax rate in the UK is 19%, which is significantly lower than the higher income tax rate of 45%.
It’s worth noting that the tax advantages of buying property through a company mainly benefit those in the higher tax brackets. If, as an individual, your income falls within the basic rate tax band, then the tax savings made by purchasing property through a limited company may not be significant enough to outweigh the additional administrative costs.
Remember, within a limited company, rental income and expenses are handled within the company. The company can claim a wider range of expenses, including mortgage interest, which can further reduce the corporation tax bill.
The Implications of Mortgage Interest Relief
One major tax benefit of buying rental properties through a limited company is the handling of mortgage interest. In the past, individual landlords could deduct their mortgage interest from their rental income before calculating their tax bill. However, this changed in 2020, and individual landlords can now only claim a basic rate tax relief on their mortgage interest.
In contrast, limited companies can still deduct mortgage interest as a business expense. This effectively reduces the company’s taxable profits, potentially resulting in a lower tax bill.
Understanding Capital Gains Tax
When considering buying property through a limited company, Capital Gains Tax (CGT) should not be overlooked. CGT is a tax on the profit you make when you sell an asset that has increased in value.
Individuals have a tax-free allowance, known as the Annual Exempt Amount, on gains from selling property. However, companies don’t have this allowance. Instead, the gain is added to the company’s other income and profits, and corporation tax is charged on the total.
The current rate of corporation tax on capital gains for companies is 19%, while for individuals, the rates are 18% or 28% depending on whether you are a basic rate or higher rate taxpayer. This shows that there can be significant tax savings for investors selling property through a limited company rather than as an individual.
The Consequences of Extracting Profits from the Company
Once the property is owned by the company, it could be challenging to take money out. Any money taken out of the company is subject to taxes. If you extract the profits as a salary or a dividend, you will pay personal tax on those amounts.
By retaining the profits within the company, they can be reinvested in additional properties. The company can also loan the director money, but this can have tax implications as well.
Finally, it’s important to remember that creating a limited company comes with an additional burden of administration and accountancy fees. However, these costs can be offset against the corporation tax bill.
Overall, the tax implications of purchasing property through a limited company in the UK are complex, but they can result in significant savings. Consider all the factors and seek professional advice before making the decision.
Stamp Duty Land Tax: A Major Consideration
Purchasing property, whether as an individual or through a limited company, involves the payment of Stamp Duty Land Tax (SDLT). This is a tax on the purchase of properties in England and Northern Ireland, with similar taxes applicable in Scotland and Wales (Land and Buildings Transaction Tax and Land Transaction Tax respectively).
When buying a property worth over £125,000, individuals are required to pay stamp duty. The rate varies between 2% and 12%, depending on the property’s price. However, for limited companies, the rules differ slightly. If a limited company buys a residential property worth over £500,000, it must pay a flat stamp duty rate of 15%. This is significantly higher than the rates for individuals.
For companies, there are certain exemptions and reliefs available which can reduce the amount of stamp duty payable. For instance, if the property is to be used for a rental business or is purchased by a property development company, the company might be eligible for relief.
Further, second properties purchased by individuals attract an additional 3% stamp duty, regardless of the property’s price. In contrast, limited companies don’t pay this additional amount if the property bought is the first or only property owned by the company.
However, limited companies pay the additional 3% on secondary properties, just like individuals do. Hence, if a company already owns a property and is buying another one, it will have to pay the extra stamp duty.
Given the substantial difference in the stamp duty rates, it’s essential for investors to consider this aspect when deciding on the method of property investment. Consulting a tax advisor can provide a thorough understanding of stamp duty implications and potential ways to minimise it.
Inheritance Tax and Succession Planning
For those thinking about the future, inheriting property through a limited company comes with different tax considerations compared to inheriting property as an individual. In the case of an individual, Inheritance Tax (IHT) applies to an estate worth over £325,000. The standard IHT rate is 40%, charged on the part of the estate that exceeds the threshold.
However, when property is held in a limited company, the company continues to exist even after the owner’s death. This means that the company’s ownership can be transferred without having to sell the property, and no IHT would be applicable. This feature can be a significant advantage for succession planning.
It’s also worth mentioning that shares in a company can be gifted during the owner’s lifetime, which can reduce the potential IHT bill. However, any gifts made within seven years of the individual’s death may still be liable for IHT.
The rules on IHT and gifting are complex, and professional advice should be sought to navigate them effectively.
Conclusion: Weighing up the Pros and Cons
The decision of buying property through a limited company in the UK, rather than as an individual, involves balancing various financial and tax implications. The corporation tax rate, mortgage interest relief, and handling of Capital Gains Tax can offer substantial tax benefits to those in the higher income tax bracket.
However, the higher stamp duty for corporate property purchases and the complexity of extracting profits from the company can offset these benefits. Furthermore, whilst there are potential inheritance tax advantages, these must be weighed against the potential complexities and costs associated with gifting and succession planning.
In addition, there are administrative considerations, as running a limited company involves annual filings, accounts, and returns.
Given the complexity of these implications, it’s highly recommended to seek professional advice before making any decisions about property investment. A tax advisor or accountant can provide a comprehensive understanding of the potential tax implications and help investors make an informed decision. In the end, the choice to invest in property through a limited company should be guided by individual circumstances, future plans, and financial goals.
