According to a recent article in the Financial Times, landlords are buying fewer properties than at any time in the past nine years. The restriction in the deduction of residential property finance costs for landlords (i.e. mortgage and/or loan interest) to the 'basic' rate of income tax taken with the increase in Stamp Duty Land Tax on non main resident properties (for dwellings costing in excess of £500,000, the rate reaches 15%) has no doubt had an adverse impact on the number of properties purchased to rent. Many landlords who remain may look to operate through a limited company but will this be the correct route to take?
Income taxwise there is little advantage in incorporation if the taxpayer is a 'basic' rate (20%) taxpayer as corporation tax is charged at 19% on the rental profit made. Incorporation is obviously more beneficial to the 'higher' rate (40%) or 'additional' rate (45%) rate taxpayer. ,
Benefits for all come when the investment property is sold because a company is charged 19%, versus a probable 28% capital gains tax (CGT) rate for an individual property investor, assuming that the property is residential. In addition, a company will only pay corporation tax on any capital gain made being the increase in value subsequent to the date of incorporation (the CGT hit coming when the shares are disposed). Good tax planning takes advantage of this rule if it is possible to claim Incorporation (roll over) relief. Here those properties with large capital gains can be transferred into the company and sold almost immediately which will avoid an immediate and large CGT liability. On the other hand an individual taxpayer may be able to take advantage of the annual exempt amount which is not available to companies.
Although the corporation tax rates are lower than the income rates for individuals, should the individual need to extract money from the company then there will be additional tax to pay on dividends (should total income exceed the personal and the 'dividend allowance). Furthermore, using a company to purchase a property could result in a double tax charge, with corporation tax payable on capital gains by the company as well as income tax being due on the extraction of cash following the sale of the property.
The main beneficiaries of incorporation are those shareholder landlords who can afford not to withdraw monies for personal use, avoiding the ‘double tax charge’. Similarly those landlords intending to retain their portfolio intact for future generations can gift small proportions of (i.e. shares in) their property, over time reducing the tax impact including of Inheritance tax (if the gifts are kept within the limits).
As ever with any decision related to tax, calculations are required as well as consideration as to intention.