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. 

The tax relief available to higher rate taxpayers for loan interest paid is restricted to 20% of the interest paid as a deduction from the tax liability. Consideration should be given to operating a limited company or transferring ownership of the property to a lower earning spouse/civil partner. 

The Corporation tax rate is currently 19%. The Government have announced that the rate will increase where profits are in excess of £50,000, the rate will be 26.5% on profits between £50,000 and £250,000 and 25% on profits in excess of £250,000. Where you control more than one company the bands will be shared equally between each relevant company. 

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 owning them as an individual. 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

 

Points 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

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 

Point 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. Point 6 shows the net gain which you would receive if you wanted to keep the company going (because it owned other properties) and point 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 table shows that higher rate taxpayers are considerably better off owning a property in a limited company rather than as individuals. Some individual taxpayers with high borrowings could more tax than the net income they are receiving if the property was not wrapped in a limited company. 

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 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 to 2025/26). 

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. If the dwelling is let out on a commercial basis then relief can be claimed but a return is still necessary.

 

 


 

Individual rate of income taxNo other
income
Basic
20%
Higher
40%
Additional
45%

 

Individual  Interest paid £15,000 net surplus £10000     2021/22 to 2025/26 (England and Northern Ireland only)

 

Net rental income after expenses10000100001000010000
Income tax (Personal allowance £12,570)
*Does not include loss of Personal Allowance above £100,000
02000*70008250
1. Net amount received by individual10000800030001750
Company
Net rental income after expenses10000100001000010000
Corporation tax (assumed to be 19% from 1st April 2023)1900190019001900
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

 

CAPITAL GAINS

As an example, let’s consider a property bought for £150,000 and sold ten years later for £300,000.
The other 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
(37,700 / 20,270 / 0 / 0 @ 18%)
34,786

36,529

38,55638,556
4. Net amount received by individual115,214113,471111,444111,444
Company
Gain150,000150,000150,000150,000
Corporation tax (at 19% to 31/3/2023)28,50028,50028,50028,500
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
*29,321*37,427*42,923*45,530
6. Net amount received by individual92,17984,07378,57775,970
Or: Wind up the company and distribute it’s assets*
Capital Gains Tax (assuming no other gains)
(37,700/30,270/0/0@10%)
*There would also be liquidator fees to be paid
18,07018,81321,84021,840
7. Net amount received by individual103,430102,68799,66099,660

 

 

 

DISCLAIMER

© Thandi Nicholls Ltd 2021 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.

 

 

 

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