Tax Doctor:
Mark McLaughlin
ATII ATT TEP

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August 2003

Q:

I am considering investing in UK residential property. Someone told me that it could be tax efficient to set up a limited company, instead of owning property personally. What are the main tax implications?

A:

Property ownership through a limited company is an option. Whether or not it will be beneficial depends upon a number of variables, such as how many properties will be acquired, how long you intend owning them and your anticipated property income. Here are some common tax considerations, to help you decide.

Buying property

Have you bought any residential property yet? If you have, it would need to be transferred to your new company. Is the property worth more than you paid for it? If the potential gain is sufficiently large, you could be liable to capital gains tax (CGT) when it is transferred to the limited company, to the extent that the gain exceeds your annual CGT exemption (£7,900 for 2003/04), assuming that the exemption has not been used elsewhere. This CGT position applies whether you gift the property or sell it to the company for full market value. There is a form of ‘holdover’ relief from CGT when a business incorporates. However, if the degree of involvement in the properties is not enough for the activities to amount to a ‘business’, it seems unlikely that this relief will be available.

If you do not own any residential property yet, then subject to any commercial considerations such as loan finance, you could introduce funds to the company to enable it to purchase the property instead. This avoids the above CGT complications.

Whether you are buying the property personally or through the company, there may be some Stamp Duty (or Stamp Duty Land Tax (SDLT), from 1 December 2003) to pay. This also applies even if you already own the property, and decide to gift it to the company. Presently, there is no Stamp Duty to pay if a residential property costs less than £60,000 (or £150,000 in designated ‘disadvantaged’ areas), but above this threshold rates vary between 1% and 4%. The same rates will also apply from 1 December 2003, when SDLT is introduced.

Renting property

Assuming that it is possible to find tenants for the residential property, what is your anticipated net rental income? If the property rental ‘business’ is operated through a limited company, you may be able to take advantage of a 0% rate of corporation tax, if profits do not exceed £10,000 a year. However, this zero rate threshold is reduced if you own other companies. The company’s profits could be retained, possibly for investment in additional properties.

Alternatively, some profits could be extracted from the company. This will normally be by salary or dividends, which of course will be taxable income in your hands. An annual salary in excess of £4,615 (for 2003/04) attracts National Insurance contributions (NICs) for both the employee and employer. Rental income received personally attracts no NICs, so this option is unlikely to be attractive.

Dividends do not attract NICs, and the maximum tax liability on dividends for a higher rate taxpayer is 25%. This will be the overall rate for both you and the company, if the dividends are paid out of profits subject to 0% corporation tax. This compares favourably with a maximum 40% tax rate on rental income from property owned personally. A dividend paid out of profits subject to 19% corporation tax will suffer an overall effective rate of 39.25%, taking into account both the company and shareholder.

Selling property

A disadvantage of company ownership can arise if a property is sold, in the form of an effective double tax charge. The company is liable to corporation tax on any capital gain if the property has increased in value. A further tax charge then arises when the net sale proceeds are distributed to the company owners, whether by salary or dividends. By contrast, if the property is owned individually, there will be a single tax charge and the gain is treated as the top slice of the taxpayer’s income, taxable at rates of 10%, 20% or (perhaps more likely) 40%.

• Individuals may deduct the annual CGT exemption (if not used elsewhere), whereas this exemption is not available to companies;
• Companies may deduct an allowance for the effects of inflation on the cost of the property (‘indexation allowance’), whereas individuals may only claim this allowance for periods of ownership up to April 1998;
• Individuals (but not companies) can deduct another CGT relief (‘taper relief’) from 6 April 1998. The rates of taper relief differ according to whether the asset in question is a ‘business asset’ or a ‘non-business asset’, with lower rates applying to non-business assets. A residential property will probably be a non-business asset (unless it is let as furnished holiday accommodation).

If you hold the shares in a company that owns property, you could sell the shares in that company, instead of (for example) the company selling the property and then deciding whether to continue with the company or wind it up. There are stamp duty reasons why it may be attractive for a purchaser to buy the shares in a property company, rather than buy the property directly. However, your share disposal would still be liable to CGT, subject to non-business asset taper relief and any annual CGT exemption not otherwise used.

Summary

You may have gathered that there is no ‘clear cut’ answer to the question whether residential property should be owned personally or by the company! Every case should be considered separately, based on individual circumstances. My advice would be to work through the buying, renting, and selling implications in advance using projected figures if possible, and to obtain professional assistance when needed.

Commercial implications

Never forget that there are commercial implications to property ownership, which should normally take precedence over tax considerations.

Firstly, there are likely to be additional costs of running a limited company compared to renting property personally, such as company formation expenses, statutory filing costs and possibly additional accountancy fees.

Secondly, how are you financing the property acquisition? If a loan is required, will ownership through a company affect your ability to obtain loan finance? Perhaps you will find that commercial considerations are largely neutral, but you should always check first.

Mark McLaughlin

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