Should You Hold Your Properties Within A Company Structure?

A question that residential landlords often ask is whether it is better to hold their property portfolio in their own name, or whether it is better to own it via a limited company. From a tax perspective, there are various factors to consider in reaching the decision and, as with most things, there are ‘pros’ and ‘cons’ to each.

Stamp duty land tax (SDLT) is payable on the purchase of freehold residential property, and also on the premium paid for the grant of a new lease or the assignment of an existing lease. 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. 

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. Between 21 March 2012 and 20 March 2014, the higher corporate rate only applied to residential property costing in excess of £2 million. 

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	Individual purchaser – SDLT rate	Corporate purchaser – SDLT rate
Up to £125,000	Zero	Zero
Over £125,000 up to £250,000	1%	1%
Over £250,000 up to £500,000	3%	3%
Over £500,000 up to £1 million	4%	15%
Over £1 million up to £2 million	5%	15%
Over £2 million	7%	15%

 

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.  

As announced in the 2014 Budget, new lower ATED bands are to be introduced. From 1 April 2015, properties valued at more than £1 million and up to £2 million will be caught by the charge, facing an annual fee of £7,000. From 1 April 2016, the charge will apply to properties valued at more than £500,000, with an annual charge of £3,500 applying to properties in the £500,001 to £1 million band. 

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.

A detailed discussion of the computation of rental profits is outside the scope of this article. However, guidance on working out the profits of a property rental business (for income tax purposes) or the corporation tax equivalent property income rules, can be found in HMRC’s Property Income manual, which is available on the HMRC website at www.hmrc.gov.uk/manuals/pimmanual/index.htm.

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.

Andrew owns three properties in his own name which he lets out. In 2014/15 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 £10,000 is covered by his personal allowance, leaving taxable income of £15,000 on which Andrew must pay tax of £3,000 (£15,000 @ 20%).

If the properties had been owned by a limited company, A Ltd, 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.

David also makes a rental profit in 2014/15 of £25,000 from his residential lets. He also earns a salary of £70,000 a year from his job in IT.

If the properties are owned by David personally, he will pay income tax on the rental income of £10,000 (£25,000 @ 40%). However, if the properties are held by a limited company, he would pay corporation tax of £5,000 (£25,000 @ 20%) on the rental profits. 

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 David personally.

However, if David 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 David owns the property himself, or if they are owned by a company and the post-tax profits are extracted as a dividend.

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 should be noted that where the properties are held in a company all the normal considerations and planning opportunities in relation to profit extraction apply, and it is advisable that professional advice is sought in order to ascertain an optimal strategy.

Chargeable gains made by an individual are liable to capital gains tax (CGT). By contrast, gains made by a company 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 (£31,865 for 2014/15), and at 28% thereafter. 

Where a company pays corporation tax at the small profits rate, corporate gains are taxed at 20%. 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 (£11,000 for 2014/15). 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 £22,000 in 2014/15. 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 optimal result depends on circumstances. 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. As always, 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. 

Professional advice should be sought prior to making the purchase to ensure that all relevant factors are considered in advance.