Published in Financial Times on 16 Feb 2017, titled "Should I buy property via a limited company?", written by Lucy Warwick-Ching
I want to buy a property and rent it out as a long-term investment, which I would then like to provide me with income when my partner retires. What are the pros and cons of making the investment personally, versus buying it via a limited company?
I would like to invest £70,000 to buy a property priced about £130,000. I am worried about being taxed on the rental income, although it will be in my name and I currently have no income as I am a stay-at-home mum. I am not planning to sell it but, if things change, what taxes would I have to pay upon sale in each scenario?
Taking into account stamp duty land tax (SDLT) and income tax, individual ownership, rather than owning the property through a company is better for you, says Philip Munro, partner in Withers' private client and tax team.
The key points to bear in mind when making your plans are the possible differences in SDLT costs when buying a property personally or via a company and, second, the possible difference in UK tax rates paid by individuals and companies on rental income.
Philip Munro, partner at Withers
The amount of SDLT will depend upon the exact purchase price but, for an individual spending about £130,000, it would be limited as there is a nil-rate band that extends to £125,000 for residential transactions. A rate of 2 per cent applies above that level until the total price exceeds £250,000, at which point it rises to 5 per cent.
By contrast, a company would probably pay 3 per cent tax on most of the purchase price, rising to 5 per cent on any element exceeding £125,000. A “second homes” stamp duty surcharge has recently been introduced and applies to almost every residential property transaction where the buyer is a company, whether or not the company already owns any other property. The charge applies to any property worth more than £40,000, and a 3 per cent rate is applied to the whole price. From an SDLT perspective, making the purchase in your name, rather than through a company, would be better for you financially.
In many situations, landlords operate through companies because income tax rates for individuals are higher than corporation tax rates. However, as you have no other taxable income, you would probably pay very little income tax on the rent received from a single property of modest value. Individuals pay income tax at graduated rates, whereas companies generally pay a flat rate on all their income and their capital gains.
While the highest rate of income tax for individuals is currently 45 per cent, compared with just 20 per cent for most companies, an individual would often pay no tax at all on the first £11,000 of their income, while a company would be fully taxed on all such income at its usual tax rate.
Considering your circumstances, holding the investment property in your name enables you to take advantage of your personal allowance. With a company, there could also be income tax implications when the company's profits are paid to you as the shareholder.
On sale of the property you would usually have to pay capital gains tax (CGT) if the property has not been your main home. The tax rate depends upon your overall circumstances. The maximum current CGT rate of 28 per cent is higher than the corresponding rate currently payable by companies at 20 per cent but, based on your situation, a portion of any capital gains could be taxed at 18 per cent and you will probably have annual CGT exemption of £11,100.
Paul Davidoff, partner, Moon Beever solicitors, adds that where the rent and your other income are both low, the tax treatment of direct ownership is frequently more attractive, while the administrative cost and complication of company ownership becomes disproportionately high. There may also be a SDLT advantage with direct ownership.
Paul Davidoff, partner Moon Beever
With direct ownership, rent will be taxed at your usual income tax rates. If you have little or no other income, it may be covered by your personal income tax allowance and be tax free. Some expenses will be deductible and some relief is given for the mortgage interest you pay.
However, if you own the property through a company the entire rent will be subject to corporation tax at 20 per cent, less deductible expenses, including mortgage interest. There is no “personal allowance”. Then, to use that rent, you would take it from the company as dividends. You can receive £5,000 of company dividends each year tax free. Thereafter, beyond your personal allowance, dividends are taxed at 7.5 per cent.
There will also be administrative matters to deal with in setting up the company, putting money into it, ongoing administration, accounting, the company's own tax returns and, later, winding the company up — these are all additional costs. It can also be harder to find a mortgage for a company purchase.
Ultimately, you need to anticipate your other income and gains, and work through the figures.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent