The analysis of whether it is beneficial for a property investor to use a Limited Company can be complex and this helpsheet aims to identify some of the key advantages in considering a Limited Company for this purpose.
Any decision must be carefully weighed up after examining your own circumstances.
Here are some advantages of using a company:
- Low Tax Rates.
Small limited companies only pay tax at 20% (2012/13) on profits up to £300K and only go as high as 24% whereas a higher rate individual taxpayer pays tax at 40% or 50%, which is a large difference. Corporation tax rates are also due 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.
- Company money box .
By leaving money in the company and reinvesting, the tax savings can be used to grow property portfolios at a much faster rate. Property development in particular is a trade and liable to income tax as opposed to capital gains tax and so can be better off in a company. However in the longer term you do still have to consider how you are going to extract your funds in a tax efficient manner from the company, which may incur a further tax charge down the line.
- Use of Dividends.
By using a limited company profits can be paid out in the form of dividends which avoids any type of national insurance payment. You can also time the taking of dividends to when you want them and so avoid going into personal higher rate tax bands by leaving the money in the company.
- Ownership transfers.
A property held in a company could be transferred more easily by means of share transfers rather than actual property transfers and also saves on stamp duty payments.
- Property Management Companies.
Sometimes a Limited Company is not wanted to hold the property but as a property management company to be used instead to manage the property and divert income into it instead and so save tax.
- Limited Liability.
As always its not just about the tax savings. Building sites can be dangerous places and tenants can have accidents. A limited company will limit the amount of your liability in these cases.
Whether a limited company is right for your property empire will depend not only on the present circumstances but your plans for the future.
How we can help you.
We can advise you on the best vehicle for your property investment activities.