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shutterstock_268202531You are a property investor and you ask the question “should I be a limited company?”.  You look in the press and the answer is a clear Yes, you ask most professional advisers and they also say yes.  Your next question should be Why? But most people don’t ask that second question and the Press and most advisers couldn’t answer it if you did.

So what is the answer to that second question Why?  The correct answer to whether you should own property through a limited company is – maybe.  The reasons it is not a simple answer is because no two people have the exact same tax position, intend to own the same number of properties or have the same strategy to owning those properties.

The press and most advisers are simply focusing on the restriction of tax relief on finance charges and nothing else.  There are a lot more matters to be considered before using a limited company to hold property.

The matters to be considered include:

  • Starting from 6 April 2017 the tax relief on Buy to Let property finance costs will be restricted so that from 2020-21 investors will only be able to get basic rate tax relief.  A lot of commentators are saying that for this reason alone investors should start investing through a limited company.  However whilst the company will pay only 20% tax what they fail to mention is that the most popular tax efficient method of getting money from a limited company is by being paid Dividends and the tax treatment of dividends is changing on 6 April 2016.  From that date the first £5,000 of dividends will be subject to 0% tax.  All dividends received above that will be subject to tax at 7.5% for basic rate tax payers, 32.5% tax for higher rate tax payers and 38.1% for additional rate tax payers.  So the cost could be much higher.  The only way to tell is to calculate the tax position for each taxpayer.  There is no “one size fits all” answer to this problem.
  • Then there is the issue of Capital Gains Tax.   When a property is owned by a company it will pay tax on the gain at 20%.  Then if the money is rolled over into another property there is no further tax cost.  However if the taxpayer wants the cash from the company (say for a holiday or to subsidise their lifestyle) then the company will either pay a dividend which will be taxed at up to 38.1% or liquidate the company which can only be done if all of the properties in the company have been sold.  This will cost in Liquidators fees (probably a minimum £10,000 plus VAT) and the tax cost will be most probably at the 28% rate.  Compare the 58.1% or 48% to the maximum 28% if the property is owned personally.
  • The latest issue on the horizon is the higher rate of Stamp Duty Land Tax (SDLT) announced by the Chancellor on 25 November 2015.  At present the Treasury have indicated that where a company buys a property then the first property will be subject to the higher rate of SDLT after that it will not.  However this indication is only given in a consultation document and the Treasury won’t announce the final legislation until March.  In addition they have not said what will happen to property companies that hold property prior to 1 April 2016.  So we are currently operating very much in the dark as to what the new SDLT legislation will be.  If you want the full details of what we know about the SDLT consultation document see our Blog on the subject.
  • Another SDLT issue is where a property is acquired by a company that costs more than £500,000.  In that case the SDLT cost is 15%.  This is not the case where the property is purchased by an individual, in that case the SDLT charge is only 8%.

As you can tell from the above the answer to the question “should I buy property through a company” is not as simple as many people would have you believe and it is therefore important to get solid professional advice based upon your individual circumstances.

If you want further advice on this matter or any other tax matter you can contact Nigel Reynolds of Reynolds and Co by email at nigelreynolds@reynoldsandco.co.uk or by telephone on 07885 490484.