18th August 2020
It is becoming more and more common for people to ask if they should own a property personally or through a limited company. This article covers the main tax issues that need to be considered.
This article refers to normal residential lets only. If you seek advice on commercial lets or furnished holiday lets please let us know.
Taxation of rental profits – held personally
Taxable rents (income less expenses), will be taxed in the year in which the income is earned. An individual will pay tax at 20%, 40% or 45% depending on their level of taxable income.
From 2020/21, an individual will receive no deduction for mortgage interest payments made. Instead this will be treated as a 20% tax reducer. Basic rate taxpayers will not lose out but higher rate taxpayers will lose relief. This change could push some basic rate taxpayers into higher rates.
Taxation of rental profits – companies
Companies pay corporation tax on their rental profits at 19% in the year in which they are earned. However, should the shareholder wish to extract this money personally from their company they will need to award a dividend.
The tax due on dividends is 7.5%, 32.5% or 38.1% depending on an individual’s tax band.
It is crucial to note that tax is only due on dividends when a company decides to award them. This gives more flexibility for tax planning as an individual may not wish to take all of the potential dividends if they will be a higher rate taxpayer in a given year.
Unlike individuals, companies are entitled to full tax relief for mortgage interest payments made.
Capital gains tax – held personally
Individuals disposing of a property will pay capital gains tax at either 18% or 28%. The gain attributable (proceeds less base cost and capital improvements) will be reduced by their annual exemption of £12,000.
From April 2020, all individuals will be required to report the gain on a residential property and pay the tax due within 30 days of sale.
Capital gains tax – companies
Companies pay tax on 19% on any gain made. Unlike an individual no annual exemption is given. It used to be the case that companies paid 28% on gains if the property was worth over £500,000. However, from April 2019 the rate changed to 19%.
A further charge arises when the funds are withdrawn from the company. This is either at the dividend rates mentioned above, or if the company was wound up, the funds would be taxed at 10% or 20% depending whether the individual is a basic rate or higher rate tax payer.
Unlike individuals, companies will not be required to report and pay the tax within 30 days.
Reporting requirements – held personally
The rental profits will need to be disclosed on an annual Tax Return which is due with HMRC the 31 January following the end of the tax year. The tax due on rental profits is also due by this date.
Reporting requirements – held in a company
Annual accounts will need to be prepared, which are due 9 months after the end of the accounting period. Also the company will be required to complete a corporation tax return.
The corporation tax is due 9 months after the accounting period end and the return is due for submission 12 months from the year end.
In addition, tax returns will be due for those in receipt of dividends from the property company.
Stamp duty land tax (SDLT)
Individuals purchasing properties will be required to pay SDLT at the additional rates (assuming they already own a property). Companies also have to pay SDLT at this rate.
If an individual decides to transfer a property to a company SDLT may be due on the transfer value.
Recently, a temporary reduction was announced in the reduction of SDLT rates and this is expected to last until 31 March 2021.
There is no set answer as to whether it is best to hold a property in a company or personally as there are many variables to consider such as:
If you wish to discuss the above please feel free to contact us and we can assess what is the most effective way to own your rental properties given your circumstances and aims.
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