Landlords using companies to buy property
What are the pros and cons?
Residential Property
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Ownership structures:
The basics: Personal vs company
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structures – many different types Jointly Partnership Individually Rental Co Ltd Rental Co Ltd Trust
Ownership
Personal ownership
Income Tax
• What rate of income tax? 20%/40%/45% or more.
• Loan interest relief restriction.
Capital Gains Tax
• 28% tax on the growth in the property value.
Property
Inheritance Tax
• IHT £600,000 at 40% = £240,000.
Stamp Duty Land Tax
• Normal SDLT rates + 3%.
• Non-resident extra 2%.
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Income Tax - general principles
Reduce/loss personal allowance if income > £100,000
Each individual has their own tax rate bands
Income tax rates are different in Scotland
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£12,570 £112,300 0% 20% 40% 45% over £150,000 33.75% 8.75% 39.35% over £150,000 Dividend income, after £2,000 allowance Uses up BRB Non-Dividend income £37,700 0% Personal Savings allowance
£1,000 basic rate taxpayer
£500 higher rate taxpayer. Uses up BRB.
Calculating your profits – the loan interest relief restriction
Action - Know your tax rate!
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Old rules New Rules Gross rent 12,000 12,000 Allowable costs (500) (500) Mortgage interest (5,000) Net profit 6,500 11,500 Tax at 40% 2,600 4,600 Less interest relief at 20% (1,000) Net tax liability 2,600 3,600 Effective rate on actual profit 40% 55% Cash Basis Or Accruals Basis
Reporting rental profits
• Income self-assessment tax return – 31 Jan but MTD!
• Income Tax payments: 31 Jan (or 31 Jan and 31 July).
Making Tax Digital – MTD
• Start date - April 2024.
• Start to prepare for:
• quarterly reporting – 30 day deadline
• digital records.
• Consider software.
• Capital Gains Tax Returns and tax payment – 60 Days.
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Company tax on property - general principles
• Corporation Tax on any rental profits 19% tax rate (increasing for some to 25% from April 2023).
• Relief for loan interest.
Rental Co Ltd
• Corporation Tax on capital gains - 19% tax rate (to 25% from April 2023).
• Income Tax on extraction from Company –dividend 8.75%, 33.75%, 39.35%. – increased from April 2022.
Note:
• ATED – Annual Tax Return needed, but exemption from tax charge.
• SDLT + 3% (can be 15% or 17%).
• Inheritance Tax 40%.
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Illustration of net cash position
Company vs personal ownership – from April 2023
Figures in table show amount received after tax.
• Income from property – capital gains excluded.
• Owning personally can be better if extracting all profits.
• Owning in company can be better if repaying corporate debt or restrict extraction.
*Effective tax rate higher if loan interest restriction.
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Corporation Tax - Compliance
• Company accounts to Companies House – 9 Months.
• Corporation Tax returns to HMRC – 12 Months.
• Corporation Tax payments: 9 months and 1 day.
• Annual Tax on Enveloped Dwellings Return – 30 days from purchase or 30 April.
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Personal vs Company - company aspects
• Do a cost benefit analysis – how much is the tax benefit vs extra costs?
• Do you need a dividend? Dividend planning.
• Pay down capital repayments quicker - Retained profits and repayments of capital are charged to Corporation Tax and not Income Tax.
• Compliance effort and complexity is greater.
• Costs of running a Company incl. accounts and tax returns.
• Plus others…
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Acquiring a property – Using a company
Loan from shareholder
e.g. £500k + costs
Tax aspects of funding the acquisition.
• Deposit via loan account.
• Bank finance – CT deduction.
• SDLT + 3%.
• ATED relief return – 30 days.
Rental Co Ltd
£1m property
Bank finance
e.g. £500k
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Company ownership structure:
Who should own the shares?
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U.K. LLP
Family Investment Companies
Who could own the shares?
• Involve the wider family.
• Children and grandchildren.
• Family Trust.
• Set up the structure from the beginning.
Rental Co Ltd
Consider:
• Dividends – Income tax.
• Inheritance Tax.
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Typical structure: Inheritance tax example
Trust A
B 25%
- Loan account gift
- £500k deposit – gift that to children
IHT saving @ 40% = £200k survive 7 years.
- Share value from set-up - nil
- Share value on growth - £1m Growth, 50% to parents. 50% to trust.
Rental Co Ltd
IHT saving - 50% x £1m growth @40% = £200k
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25%
£1m start £2m value now C
50%
What value is in your estate?
Concluding thoughts
New property purchases
• Cost benefit analysis – run the numbers.
• The larger the profit/loan the more likely a company is tax efficient.
• Structure the shareholdings – income and inheritance taxes.
Existing property
• What is the current financial position? Calculation.
• What benefit is there of change?
• What is the cost (financial and tax risk) of the change?
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