There was a time when a limited company was considered the best way to
hold rented properties; then the times (and the tax rates) changed and holding
investment properties in a company became less attractive.
With rates of corporation tax plummeting over the last few years, and
set to reach 20% for all companies in a couple of years, it may be the time to
reconsider the use of a property company.
In particular, if part of your strategy involves selling properties to
realise the capital gains they have made (and property prices seem at last to
be rising again!), bear in mind that the company will pay only 20% on its
capital gains, whereas you (if you are a higher rate taxpayer) will pay 28%.
When considering whether to use a company to hold your properties, much
depends on the size of your planned portfolio, and how much cash you want to
extract from it. If the plan is to reinvest the rental profits and acquire more
properties, then the company will only pay 20% tax on its profits, whereas you
could be paying 40% or even 45%.
If you want to draw out the profits for your own use, however, a
company will not save you significant sums in tax, because when you draw out
the profits as dividends (the most tax-efficient way to do this) the effective
rate of tax for a 40% taxpayer is 25% on the dividend paid, and when you bear
in mind that dividends are not tax deductible for the company, it works like
this:
Example
– The cost
of drawing company profits
Derek is a 40% taxpayer.
His property company makes a profit of £30,000, and he wants to pay this out as
a dividend. He can only pay a maximum of
£24,000, because the other £6,000 is needed to pay corporation tax. On his
£24,000, he will pay income tax of £6,000, so the total tax paid by him and the
company is £12,000, or 40% of the profits – exactly the same tax he would have
paid if he owned the properties directly.
If Derek leaves the
profits in the company to invest in more properties, however, he will have
£6,000 more to invest than he would have if he owned the properties directly.
Timing
A company can decide when to pay dividends, so to some extent this
enables you to control the rate of tax you pay on your dividends. If you own
properties directly, you are taxed on the profit as it arises and apart from
the timing of expenses like repairs, there is little you can do to change this.
Things a company cannot do
It is also worth bearing in mind that there are certain strategies that only work in the case of properties you own personally rather than through a company:
• Equity release – as a property owner, you can remortgage a property and use the cash for your own purposes, provided the mortgage is no greater than the market value of the property when it was first let. A company can, of course, remortgage its properties in the same way, but to extract the cash you will need to receive a (taxable) dividend.
• Main Residence – the exemption from CGT on your “only or main residence” does not apply if the property is owned by a company – indeed, there is likely to be a tax charge on you for the benefit of being allowed to occupy the property!
Practical Tip :
Whether a company will be the best way to own your property portfolio depends very much on what your business strategy is. As with most tax matters, there is no “one size fits all” answer to the question, but it is a question every property investor should be asking themselves.
James Bailey
