Is it worth having a limited company?

Properties can be held in either in individual name(s) or in a limited company. They can also be held in trusts or non-domestic properties can be held in self-administered pension schemes which are not dealt with here.

Until 8th July 2015, unless you intended to hold the properties for a long period and did not need to use the income, we would not have recommend holding your properties in a limited company. Because of the changes made in the Budget on 8th July 2015, this now needs to be considered on an individual basis as it will depend on the amount of interest paid in each case.

From 6th April 2017 there is a gradual reduction in the relief available to higher rate taxpayers for loan interest paid. Consideration should be given to operating a limited company or transferring ownership of the property to a lower earning spouse/civil partner.

Corporation tax rates are remaining at 19%. The reduction to 17% has been cancelled.

Care needs to be taken if you already own a property and you are thinking of transferring it to a limited company as this could crystallise a Capital Gains Tax liability and/or a Stamp Duty Land Tax liability.

Below is a table indicating the tax implications of owning properties in a company compared with individual names for 2016/17 and 2020/21. It assumes net income before interest of £25000 with interest paid of £15000 to give a profit of £10,000 and assumes a gain of £150,000 after 10 years of owning a property. There are implications if the rental income or dividend causes you to cross a tax rate band.

Limited company owns the property and it makes no distributions

The green lines (2 and 5) indicate the net income and net gain respectively after corporation tax which would be accumulated within your limited company, provided you do not to draw out any income or gains.

Property in your name and no limited company

The amber lines indicate amounts retained by you as an individual depending on your tax rate. Lines 1 and 4 show the after tax income and the gain retained by you respectively if you owned the property yourself and there was no limited company.

Limited company owns the property and it distributes all its profits

Line 3 shows the net income you would receive as an individual if your limited company owned the property and it distributed the income to yourself as a dividend. Line shows the net gain which you would receive if you wanted to keep the company going (because it owned other properties) and line 7 shows the amount which would be received if you were to liquidate the company and distribute the assets. There are anti avoidance provisions to ensure that capital distributions are restricted if a new company is set up after an old company has been liquidated.

So, if you require the income personally, then the amber lines show that higher rate taxpayers are considerably better off owning a property in a limited company rather than as individuals in 2020/21 when the loan interest restrictions are in full operation. Some taxpayers with high borrowings could see their tax liabilities increase substantially.

AS ALREADY STATED EACH CASE WILL BE DIFFERENT DEPENDING ON THE LOAN INTEREST PAID SO ADVICE SHOULD BE SOUGHT, BEFORE SETTING UP A LIMITED COMPANY. THE EFFECT OF THE £2000 (from 2008/19) DIVIDEND 0% BAND ALSO DISTORTS THE FIGURES SO YOU MUST LOOK AT EACH CASE ON AN INDIVIDUAL BASIS.

Companies can only claim indexation allowance up to 31st December 2017. This does make the comparisons a lot easier and as you can see the tax payable on the disposal of a property is now more in a corporate structure.

The examples are for individuals. Couples may have different income tax rates and they have two Capital Gains Tax exemptions (£12,300 each for 2020/21).

Other factors to be taken into account

If you require a loan, this may be more difficult to obtain in a limited company.

Limited companies are required to prepare statutory accounts and file accounts with Companies House with potentially increased administrative costs.

Shares can be transferred to family members making use of the Capital Gains exemptions although there are valuation issues.

Dwellings which are currently worth more than £500,000 and are held in a limited company are liable to the Annual Tax on Enveloped Dwellings charge which starts at £3,700 pa and increases to £236,250 pa for properties worth more than £20million.

 

INCOME

2016/17

Individual rate of income taxNo other
income
Basic
20%
Higher
40%
Additional
45%
Individual  Interest paid £15,000 net surplus £10000     2016/17
Net rental income after expenses10000100001000010000
Income tax (Personal allowance £11,000)
*Does not include loss of Personal allowance above £100,000
02000*40004500
1. Net amount received by individual10000800060005500
Company
Net rental income after expenses10000100001000010000
Corporation tax2000200020002000
2. Distributable profits / retained by company8000800080008000
Pay dividend to individual shareholder
Higher/Additional rate tax on dividend
*Does not include loss of Personal Allowance above £100,000
Assumes £5000 dividend allowance available in full
0225*9751143
3. Net amount received by individual8000777570256857

INCOME

2020/21

Individual rate of income taxNo other
income
Basic
20%
Higher
40%
Additional
45%
Individual  Interest paid £15,000 net surplus £10000     2020/21
Net rental income after expenses10000100001000010000
Income tax (Personal allowance £12,500)
*Does not include loss of Personal Allowance above £100,000
02000*70008250
1. Net amount received by individual10000800030001750
Increase in tax payable from 2016/17 to 2020/210030003750
Company
Net rental income after expenses10000100001000010000
Corporation tax1900190019001900
2. Distributable profits / retained by company8100810081008100
Pay dividend to individual shareholder
Tax on dividend
*Does not include loss of Personal Allowance above £100,000
Assumes £2000 dividend allowance available in full
0458*19832324
3. Net amount received by individual8100764361185776
Increase/(Decrease) in tax payable from 2016/17 to 2020/21(100)1339081081
The decrease is due to the reduction in the corporation tax rate.

 

CAPITAL GAINS

As an example, let’s consider a property bought for £150,000 and sold ten years later for £300,000.
The total income of the basic rate tax payer is assumed to be £20,000 and the higher rate tax payer is £60,000.
Individual rate of income taxNo other
income
Basic
20%
Higher
40%
Additional
45%
Individual  with £10,000 rental income in the tax year of disposal
Gain (and no other gains in tax year)150,000150,000150,000150,000
Capital Gains Tax
(37,500 / 30,000 / 0 / 0 @ 18%)
34,80635,55638,55638,556
4. Net amount received by individual115,194114,444111,444111,444
Company
Gain150,000150,000150,000150,000
Coporation tax28,50028,50028,50028,500
5. Distributable profits / retained by company121,500121,500121,500121,500
Either: Pay dividend to individual shareholder
Higher / Additional rate tax on dividend
*Based on income of £0/£20,000/£60,000/>£150,000
*29,963*40,304*42,900*45,530
6. Net amount received by individual91,53881,19678,60075,971
Or: Wind up the company and distribute it’s assets*
Capital Gains Tax (assuming no other gains)
(37,500/30,000/0/0@18%)
*There would also be liquidator fees to be paid
26,82627,57630,57630,576
7. Net amount received by individual94,67493,92490,92490,924

 

DISCLAIMER

© Thandi Nicholls Ltd 2020 All Rights Reserved – The above article is provided for guidance only and may not cover your personal circumstances so you should not rely on it. It is important that you

seek appropriate professional advice which takes into account your personal circumstances where you

can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.

 

Do you have a question for our experts?

If there’s a property tax issue that has you puzzled or worried, get in touch. Everyone on our team loves to talk, especially when it helps people like you find peace of mind.