If you have a property rental business, you may be running it through a limited company, or you may be running an unincorporated business and wondering whether you should incorporate.
There are advantages and disadvantages to incorporation.
Incorporating an existing property rental business
If you already run a property rental business and want to incorporate that business, you will incur some up-front costs, which may be significant.
One of the main disadvantages is that SDLT (or LBTT in Scotland or LTT in Wales) has to be paid again. As the properties are being transferred to a connected company, the SDLT is based on the market value of the property.
You may also realise a chargeable gain when you dispose of properties that you own personally to your limited company. However, where the consideration is in shares, incorporation relief (which applies unless you disclaim it) provides for the gain to be held over until the shares are sold, deferring the time at which any capital gains tax needs to be paid.
Setting up a new limited company and purchasing property
If you are thinking of starting a property rental business and running it as a limited company, you will need to set the company up. Once set up, the company will need to acquire the rental properties (securing finance if need be). SDLT (or LBTT in Scotland, LTT in Wales) will be payable when the properties are purchased.
Tax on rental profits
One attraction of operating as a limited company is that you will pay corporation tax at 19% on your profits rather than income tax at 20%, 40% or 45%.
However, a company does not have a personal allowance, so corporation tax is payable from the first £1 of taxable profit.
Remember also that the rate of corporation tax is due to increase from 1 April 2023 for companies with profits of more than £50,000 but will remain below the higher and additional rates of income tax.
You can deduct expenses wholly and exclusively incurred for the purpose of your property business when working out your taxable profits.
The tax relief available to landlords running unincorporated property businesses has been gradually restricted over the last few years. As an unincorporated landlord, you can no longer deduct finance costs, such as mortgage interest, when working out your taxable profits. Instead, you will receive relief as a tax reduction of 20% of the finance costs, regardless of the rate at which you pay tax. The restriction does not apply to furnished holiday lettings.
By contrast, your property company can deduct allowable finance costs in full when working out its taxable rental profits.
If your limited company disposes of a property, your company will pay corporation tax on any chargeable gain at the corporation tax rate of 19%. By contrast, if you dispose of the property personally and you have income and gains in excess of the basic rate limit (set at £37,700 for 2021/22), you will pay capital gains tax at 28% on the disposal of a residential property and at 20% on the disposal of a commercial property. If your income and gains do not exceed the basic rate band, you will pay capital gains tax at, respectively, 18% and 10%.
However, your company will not benefit from the annual exempt amount (set at £12,300 for 2021/22).
Your company must pay corporation tax on any chargeable gains as part of its corporation tax liability nine months and one day after the end of its accounting period. If you make a residential property gain personally, you must report it to HMRC within 30 days and make a payment on account of the capital gains tax due.
Annual tax on enveloped dwellings
If your limited company holds residential property valued at more than £500,000 you will need to consider whether a charge to the annual tax on enveloped dwelling arises. However, you can benefit from relief if you are running a qualifying property rental business. This will be the case if you are carrying on a property rental business on a commercial basis with a view to profit.
Extracting profits from your property rental company
Although you may less pay tax on your rental profits if you run your business through a limited company rather than as an unincorporated property business, this is not the full story. If you want to make use of the rental profits for personal use, you will need to extract them from your company, and this may trigger tax and National Insurance liabilities, depending on the extraction route taken.
We can help
Starting your property business by using a company wrapper may well be the best option. However, incorporating an existing property business may involve significant stamp duty and capital gains tax payments unless care is taken with the way your company is set up.
If you need help choosing the best option please call our team of property accounting and tax experts on 0230 7330 0000 we can help.