Building solid foundations: Investing in property

Thinking of investing in property? Not sure if you should purchase a buy to let property in your personal name(s) or invest through a Limited Company?

Deciding whether to invest in property in your personal name(s) or through a limited company is a complex decision with no simple answer. Both tax and commercial issues should be considered when choosing the most suitable option to minimise tax and get the most out of your investment.

A brief overview of the two different structures:

Personal Ownership (including partnerships and LLP’s)

  • This structure is seen to be more beneficial for short-term property ownership with the intention of making a capital gain, have access to the rental income or if the individuals owning the property are basic rate tax payers with a small portfolio.
  • Individuals personally owning a property are subject to Capital Gains Tax on the profit on the sale proceeds less the original cost (18% for basic rate tax payers and 28% for higher rate tax payers). Individuals can use their annual CGT allowance currently £11,100 per person (where property is jointly owned by husband and wife or civil partners, both parties can make use of their allowance).
  • It is important to remember that any rental income is taxable at the individual’s highest rate of tax, if jointly owned the property is assumed to be owned in equal shares.
  • Currently landlords can offset mortgage interest against their tax bill and also claim for wear and tear but from April 2017 landlords will be limited to the amount they can claim as relief on mortgage interest to the basic rate of tax thereby reducing profits.
  • Raising finance is easier and cheaper as the vast majority of buy to let lenders will only lend to people who buy properties in their own names. (Commercial lenders / mortgages are more flexible in this regards but usually charge higher rates).

Limited Company Ownership

  • This corporate structure is more beneficial for long term investment, as this could reduce your tax bill, often with profits being retained to purchase additional properties.
  • Corporation tax (currently 20% reducing to 19% in 2017 & 18% in 2020) will be payable on the rental profits. However, when disposing of the property the company will have to pay both the corporation tax and further tax if they wish to withdraw the proceeds from the company by way of dividend at the Directors highest rate of tax. The new dividend rule in April 2016 will potentially make it even more expensive for Directors to withdraw profits from the company.
  • Company ownership gives greater flexibility in sharing ownership.
  • Mortgage providers are less willing to offer mortgages to Limited companies and can make funding the acquisition more expensive and difficult.

How easy is it to switch properties to a company? 

It is not easy to transfer personally held properties into a company and any transfer is usually considered a disposal for capital gains tax purposes. There may also be a potential stamp duty charge for any properties worth more than £125,000. So it could cost more to transfer the property than the possible tax savings of owning the property via company. In most circumstances, landlords would be better off by retaining the current structure and purchasing future properties via a company.

Which route should you take?

Which is the best route to take? You can see that the decision to hold property directly or via a company is not necessarily a straightforward one and it depends who you are and what you plan to do.

If you would like further information about this topic or to talk through your options please give us a call on 0208 952 2234 or request a call back through our website www.cogentaccountants.co.uk and a member of the Cogent team will get in touch at a time convenient to you.