What works better, holding a buy-to-let property investment personally or via a company? 

Accountants, advisers and property owners please see: Buy-to-let ownership: personal v company? (subscribers) the detailed version of this guide. It includes worked cases studies for profit extraction, CGT reliefs, tax planning, share planning, trusts, IHT issues for non-doms and much much more.

At a glance

At a glance: some of the differences between ownership as an individual or via a company for tax:

Held personally

Held through company

Income Tax

  • Taxed on profits at marginal tax rate (up to 45%), regardless of when the money is withdrawn from the business.
  •  Full relief for mortgage interest is withdrawn from April 2017: see Restricting mortgage interest relief

Corporation Tax

  • Letting is a business for corporation tax purposes.
  • Profits and gains on disposal are taxed at Corporation Tax rates.

PAYE

 

Tax on disposal of the property: UK resident

  • Residential subject to capital gains tax (CGT) after deducting any available annual exemption.
  • The lower rates of CGT introduced from April 2016 do not apply to the disposal of residential property.

Tax on disposal of the property: UK resident

  • An indexation allowance is frozen at 31 December 2017. 
  • Payment date is subject to ordinary corporation tax payment deadlines.

Tax on disposal of the property: non UK resident

Tax on disposal of the property: non UK resident

  • From 5 April 2015 a non-UK resident company is subject to CGT when disposing of an interest in UK residential property.
  • From 6 April 2019, the disposal of shares in property-rich companies, by non-resident shareholders with 25% or more (with connected parties) interest will be subject to CGT.
  • See Non-resident CGT: UK residential property

ATED

Extraction of funds

Income 

  • In general profits are available for the individual as fully taxed either as rental income or CGT on disposal.

Capital

  • A disposal of a property at a profit will trigger a capital gain.
  • A disposal is treated in most cases at market value.

 Incorporation

 

Extraction of funds from the company

Profit extraction

Income tax

  • Potential double tax charge when profits extracted as dividends by higher rate taxpayer, or by basic rate taxpayer (from April 2016).

Changes to dividend taxation from 2016/17:

  • All individuals can receive a dividend allowance.
  • Tax above the allowance is on three dividend tax bands: 7.5%, 32.5% and 38.1%
  • Tax credit abolished
  • Dividends received by pensions and ISAs are unaffected

See Dividend tax (rules 2016/17 on)

Capital gains tax

  • Profits may be extracted as a capital distribution on striking off or winding up. 
  • Subject to new anti-avoidance rules from 6 April 2016.
  • see Transactions in Securities

Ownership

  • The maximum number of legal owners of land and property is restricted to five.
  • Owners need to decide whether to hold property as joint tenants, or tenants in common and also to consider the effect on joint tenants of changing beneficial interests in the property.
  • See Joint Property: legal v beneficial ownership

Ownership

  • A company may have multiple shareholders.

Losses

Losses

  • Locked into the company and cannot be offset against the owner's other income.
  • Losses can be offset against total company profits of the current or future years, as long as the rental business continues.
  • See Losses

Annual Tax on Enveloped Dwellings (ATED)

  • No exposure to ATED charge.

Annual Tax on Enveloped Dwellings (ATED)

  • The ATED regime applies to high value residential properties held by non-natural persons (e.g. a company) subject to exemption when the property is let on a commercial basis. 
  • The ATED charge is payable if the letting business ceases see Annual Tax on Enveloped Dwellings (ATED)

Stamp Duty Land Tax (SDLT)

 

Land and Building Transaction Tax (LBTT)

Stamp Duty Land Tax (SDLT)

  • Charged on purchase from or gift by an individual to their connected company. 
  • From April 2016 a 3% premium applies on the purchase of residential property by companies.
  • See SDLT & residential property.

Stamp Duty

 

From 1 April 2015 properties in Scotland are subject to LBTT instead of SDLT.

See LBTT: Additional Dwelling Supplement

 From 1 April 2018 Welsh Land Transaction tax (LTT)  is replaces Stamp Duty Land Tax (SDLT) in Wales, see  Welsh Land Transaction Tax.

 

 

Inheritance Tax (IHT)

  • BPR relief is unlikely to apply in respect of let property: it is an investment asset.
  • Beneficiaries of the estate on death will receive the property at market value so there would be no capital gains tax for them to pay on an immediate sale.

IHT and non-doms

  • IHT only applies to UK situated assets for a non-UK domiciled individual.
  • From April 2017, IHT extends to non-UK domiciled individuals (or their trusts) where UK residential property is held indirectly through a foreign company or partnership.

see Property Letting CGT and IHT issues.

 

Inheritance Tax (IHT)

  • IHT Business Property relief will not apply to shares unless the company has significant other non-investment activities.

See IHT Business Property Relief

  • On death a shareholder's shares will benefit from an uplift to market value in the hands of the beneficiaries. Property held in a company receive no similar uplift.

Non-dom owners

  • From April 2017 IHT extends to non-UK domiciled individuals (or their trusts) where UK residential property is held indirectly through a foreign company or partnership.
  • See Non-domicile status & tax

De-enveloping

N/A

De-enveloping

  • The transfer of a residential property from a company back to its shareholders.
  • A range of different options, see De-enveloping

 

VAT

  • Residential lets are always exempt, however commercial letting can be standard rated if the owner has opted to tax.
  • If the property qualifies as a furnished holiday let, then the income generated is standard rated and the owner will have to charge VAT if they are registered.
  • See also VAT: partial exemption

VAT

  • Income from property letting is exempt from VAT with the exception of commercial letting which is standard rated if the company has opted to tax the building.
  • The letting of furnished holiday lets is a standard rated activity.
  • See VAT: Land and property at a glance 

Converting business into a trade

  • See Furnished Holiday Letting (FHL) for more detail about generating income from property as a furnished holiday let.
  • A FHL qualifies as a business asset for CGT relief including roll-over relief.

Converting business into a trade

 

Buy to let: use as an investment company/pension/alternative to trust

A property investment company can be is a tax efficient vehicle see: Buy-to-let ownership: personal v company? (subscribers) the detailed version of this guide, see also:

New property business


Property Letting: CGT and IHT issues

See:

Case study

Case study for 2015/16, 2016/17, 2017/18, 2018/19.

Step by step comparison of tax between a personal ownership and a company tracking tax reliefs and liabilities on incorporation and then considering different methods of profit extraction and following by sale or transfer for IHT.

See Buy-to-let ownership: personal v company? (subscribers) the detailed version of this guide

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