Whether or not to invest in property through your limited company might be something you’ve considered. Definitely you can do this, but whether it is tax efficient is an important question to ask before you do anything, particularly if you are tipping the higher earning bracket.
So let’s assume that the property you buy is for rental income:
Buying property for rental income through the company name
- Rent received from the property will be subject to corporation tax @ 20%.
- Rental profits taken as salary or dividends will be taxable income taken from your band.
- Dividends do not attract NIC, and the maximum tax on dividends for a higher rate taxpayer is 32.5%.
- Any sale will be subject to CGT 18% (basic rate) or 28% (higher rate).
- Companies can deduct an allowance for the effects of inflation on the cost of the property (‘indexation allowance’).
- If the company got into difficulty legally or financially, the property would be at risk. Additional legal costs and taxes would be due to transfer the property back to you.
- A director’s personal guarantee may be required which takes you out of limited liability protection of your own personal assets.
- If you apply for commercial finance to buy residential property the mortgage rate may not be as favourable.
- If registered under the flat rate scheme, rental income will constitute turnover for VAT purposes of which you’ll give HMRC a proportion each quarter.
Buying property for rental income through your personal name
- Income tax payable @ 20% or 40% depending on your tax bracket.
- Income will use up some of your tax band and leave less for basic rate dividends from your company.
- Individuals may deduct the annual CGT exemption.
- Individuals can claim indexation allowance only for periods of ownership up to April 1998.
- You will be obliged to fill in a SA tax return.
Owning residential property either through the company or personally has disadvantages and advantages. For example, basic rate taxpayers should strictly avoid buying property through a limited company while higher rate tax payers, who are not looking to take salary or dividends from the company, can reduce their tax liability from 40% personal tax to 20% corporation tax.
Each individual case is different and depends very much on the long-term goals of the individual or the company. That is why this critical long-term tax-planning decision should always be discussed with your accountant to look carefully at all the implications and consider all other choices open to you.