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Two of the most burning questions property investors have are,
‘Should I buy my property through a limited company?’
‘Should I move my properties into a limited company?’
Well, this really depends on your
a) chosen investment strategy;
b) personal and financial circumstances/ambitions; and
c) how long you intend to hold the properties.
However, before you even decide whether a limited company will improve your tax position, there are some very basic rules/guidelines that mustbe understood.
In this strategy, property tax specialist Ian McTernan will tell you what you must consider before you can decide if holding your properties through a limited company will benefit YOU!
‘What if I am already a property investor?’
Do YOU already own investment properties?
Are you already on the buy-to-let investment ladder?
If the answer is YES and you are now wondering whether moving your properties into a limited company is a good idea, then consider the following fact:
*** Properties must be transferred into a company at market value! ***
Moving properties into a company is treated in the same way as if you were selling the properties!
What this means is that if you bought your investment property five years ago and you would now like to move it into a limited company, then you are likely to have to pay an IMMEDIATE capital gains tax liability. This is purely due to the fact that property prices have significantly increased over the past few years!
The exception to this rule is if the property is your Principle Private Residence.
‘What about buying my first property through a limited company; is it beneficial then?’
As a general rule, if you intend to re-invest the money you have made through your property investments, i.e., you want to continue re-investingthe profits into acquiring more properties, then it will be beneficial.
There are three SIGNIFICANT tax benefits of growing a property portfolio through a company.
These are explained below.
a) The first £10,000 that a company makes is exempt from corporation tax if it retained within the company. This means that you will not have to pay any company tax on profit that is equal to or below this threshold level.
b) If you are a lower- or middle-rate tax payer, then you can extract money out of a company by way of a dividend without paying any tax.
However, if your dividend extractions take your personal income into the higher-rate tax band, then you are liable to pay tax at the higher rate of 40% on this amount.
c) It is possible to wind up your company in a tax efficient manner and take the money out.
‘So what are the other BENEFITS of owning property through a limited company?’
Here are some additional favourable benefits to consider when deciding whether to own your properties through a limited company.
- A company can define its own accounting period. However, the accounting period cannot exceed 18 months.
- You only pay stamp duty at 0.5% when purchasing company shares.
- Indexation relief is still available for any capital gains.
- You will enjoy lower tax rates as companies pay between 0% and 30%.
- Properties can be transferred within companies without incurring a tax liability.
- You can grow a portfolio more quickly within a company by continuing to re-invest the profits, thus deferring any tax.
- Dividends can be extracted from a company in a tax efficient way.
‘So what are the DRAWBACKS of owning property through a limited company?’
Here are some additional drawbacks to consider before deciding to own your properties through a limited company.
- Companies cannot use the annual personal CGT allowance. This allowance is £7,900 for the tax year 2003–2004. This means that if you have a property in joint ownership, you will lose out on your combined capital gains allowance.
- Official company accounts must be produced. The cost of drawing up such accounts can be 3–4 times more expensive than having your sole trader accounts drawn up.
- Banks are less reluctant to lend money to you if you are purchasing through a company.
Ian McTernan is the author of the guide ‘How to use companies to cut your property tax bills 2005 version.’
For more information about this guide please click here.