Is it worth setting up a limited company?
Steven Glicher accountants are often asked whether it’s advantageous for businesses with property assets to set up limited company status.
The truth of the matter is setting up a limited company can be complex.
There are a number of advantages in limited company status, but it’s also needs to be borne in mind that limited company status is not suitable for every investor. Using a limited company can help to save property taxes, but it might not be beneficial for everyone in the longer term. So we’ve drawn up a list of key advantages which we hope will help you decide whether limited company status is right for you and your property portfolio.
Low Tax Rates.
Small limited companies only pay tax at 20%, (2012/13) on profits up to £300,000, and only increase as high as 24%. Individual higher rate taxpayers, on the other hand, pay tax at 40% or 50%, though this rate will drop to 45% from April 6, 2013, following changes in the budget. So the advantages of limited company status are immediately obvious. Corporation tax rates are also forecast to decrease in future years.
If you or your spouse/ civil partner already control another company, that existing company could be associated with the property and increase the tax rates for both companies. Also where the sale of property is a capital gain as opposed to trading profits, individuals only pay either 18% capital gains tax or 28% for higher rate taxpayers.
By leaving money in the limited company and reinvesting, tax savings can be used to expand property portfolios at a much faster rate. Property development, it should be remembered, is a trade and is as such liable to income tax, as opposed to capital gains tax. Leaving money in the company and reinvesting can therefore be advantageous. However, it’s worth giving some thought to the longer term and your future plans. You will still have to consider how you are going to extract your funds from the company in a tax efficient manner. Taking money out of the limited company may incur a further tax charge down the line.
In a limited company profits can be paid out in the form of dividends. This avoids the liability to pay any type of national insurance. You can also time the taking of dividends to suit your needs and personal circumstances. By leaving money in the company you can avoid straying into higher rate tax thresholds.
A property held in a company can be transferred more easily by means of share transfers, rather than actual property transfer. This has the added advantage of saving on stamp duty payments.
Property Management Companies.
Sometimes a Limited Company will not want to hold the property, but would prefer ownership to be held by a property management company and divert income into it instead and thus save tax.
Becoming a limited company will not just reduce the amount of tax you pay, it will also limited your liability should there be accidents or claims made against the company.
So is limited company status right for your business?
That all depends on your current status and whatever plans you may have for the future. Why not discuss the matter with Steven Glicher accountants and find out. Give us a call on 0161 485 8007 and we’’ give you advice on the best vehicle for your property investment activities.