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TaxationWeb by Ian McTernan, CTA

The benefits of using Limited Companies for property investment is probably one of the most frequently discussed topics in any tax discussion forum. Ian McTernan, (CTA) and author of the e-Book - 'How to use companies to cut your property tax bills', explains some of the benefits of using a Limited Company.This article has been adapted from Ian McTernan's "How to use companies to cut your property tax bill" e-book. Go to
www.taxationweb.co.uk/propertytax/ltd
for more info on the e-book.

The main factor driving incorporations over the last twelve months has nothing to do with limited liability etc. Instead the growth in company formations has been sparked by the introduction of the £10,000 starting band for corporation tax when tax is charged at 0%.

For many people investing in properties and who are higher rate taxpayers, this has been the only factor they have considered.

(Of course, if only life were that simple then I would be out of work for a start!)

Consider the following case study.

Case study – The corporation tax nil rate tax allowance

John Properties Ltd makes a profit for tax purposes of £9,999 in the year ended 31st March 2004. Tax is due as follows:

Net profit chargeable to corporation tax £9,999

Corporation tax payable at 0% £NIL


Admittedly, at first glance this rate of tax looks very attractive compared to personal tax rates. However, basing a decision solely on this would be very short sighted as there are a number of other factors involved which should be considered when deciding whether to use a company. For example, the corporation tax savings may well be outweighed over the longer term by problems extracting gains from the company.

If as a sole trader you sell a property, then after any liable capital gains tax has been paid, the remaining proceeds are yours.

If the same property is owned through a company then corporation tax is paid on the gain. You then still also have the problem of extracting the funds from the company which may incur further tax charges, resulting in a higher overall tax charge than if the property had been held personally.

It should be noted that there can be a very significant tax saving and accumulation effect by using a limited company. This can, over time, lead to quite a large difference in the size of portfolio held.

In short, there is no easy - one size fits all - answer to the question of whether a limited company is suitable for your property business. As always there are a huge number of factors to be taken into account including a large dose of ‘crystal ball’ gazing into the future and any decision can be affected by future changes in legislation which can move the goalposts completely.

Any decision must be carefully weighed up after examining your own circumstances, goals and aspirations.

7 Advantages of Using a Property Company

1. Transferring Ownership

If for example you want to gift a property to your son, then this will incur a capital gains tax liability if held outside the company. However, if you have the property inside a limited company, your son can subscribe for some shares.

If this is done then the ownership can pass to your son tax-free, as the value of the transfer can be held over for capital gains tax purposes.

2. The First £10,000 of profit is TAX FREE!

Under the current legislation, the first £10,000 of profit a limited company makes is free of tax!

This means that if you make £9,000 net profit on your rental income, then as a higher rate taxpayer you would pay £3,600 to the Inland Revenue in tax.

As a company there is no tax liability at all!

3. Lower Tax Rates

As a higher rate taxpayer, you pay 40% on your profit and gains. For a limited company, the tax rates are between 0% and 30%, a considerable saving!

4. Dividends

A limited company can pay out profits in the form of dividends, which attract under present legislation no National Insurance Contributions. You can use this to determine the income you receive in a particular year. So some years you may take money and some years you may not. You only pay tax on the amounts you take.

As an individual you are taxed on all your income whether you want it or not!

5. Property Development Profits

As you will be aware, property development is a trade. Using a limited company will help you keep much more of the profit to use in the next development!

6. Property Management Company

The use of a property management company can save considerable amounts of tax where it is not possible or desired to hold the properties within a limited company.

7. Limited Liability

Imagine you buy a buy to let property, and your tenant has an accident, falling down the stairs of the property as one of the steps was not properly maintained. He successfully sues you and not only do you lose the property to pay for the settlement, but you have to sell your own residence as well! This can be avoided by owning the property in the limited company, where the company has LIMITED LIABILITY!


For more tips, go to www.taxationweb.co.uk/propertytax/ltd

The views expressed in this article are those of the author, and are not necessarily those of Taxationweb.