Running your property business through a limited company can be beneficial from a tax perspective on an ongoing basis but incorporating an existing unincorporated property business requires careful consideration. This article assesses the pros and cons of doing so.
Income Tax and Capital Gains Tax (CGT) vs Corporation Tax
A main advantage of incorporating a property business is that the rate of corporation tax suffered on taxable profits will be lower than the income tax charged on the same unincorporated business.
Corporation tax on profits below £50,000 will be charged at a rate of 19% with this rate raising to 25% for taxable profits above £250,000 (and increasing on a sliding scale between 19-25% on profits between £50,000 – £250,000), whereas the top rate of income tax on equivalent profits in an unincorporated property business will be charged at 45%.
CGT charged on the gain on disposal of a property in an unincorporated business will likely incur tax at a rate of 24%, compared to potentially only 19% corporation tax charged on an equivalent chargeable gain within a company.
The reporting and payment deadlines for these gains is also much more lenient for a limited company. Whilst an unincorporated landlord must report and pay CGT to HMRC within 60 days of any such disposal, a company does not need to do so until the standard payment and filing deadlines for a company, being 9 months and 12 months respectively.
On the other hand, there are also some disadvantages to consider with regards to these taxes. Firstly, depending on levels of profitability, an individual can utilise a personal allowance and annual exempt amount when calculating their respective income tax and CGT liabilities, neither of which would be available to a company.
The second aspect to consider is profit extraction from the company. Profits extracted in the form of dividends will incur dividend tax rates with the top rate being 39.35%. Profits extracted in the form of a salary are deductible from taxable profits when calculating corporation tax but will subject to the same income tax rates discussed earlier and may also be subject to national insurance liabilities. Depending on the level of profit extracted, tax savings achieved from lower corporation tax rates could largely be eradicated or exceeded.
Initial costs of incorporation
When incorporating a property business, it can also be costly to transfer properties into the company. Stamp Duty Land Tax (SDLT) will be incurred by the company on each property transferred into the company and will be assessable on the full market value of each property due to rules for transfers between connected parties. These transfers will be subject to the additional 5% SDLT surcharge. The landlord may be eligible for relief from SDLT but determining eligibility is complex and subject to various anti-avoidance measures. Seeking specialist advice would be required to determine if relief could be claimed.
A chargeable gain will also arise on the individual transferring each property to the company. Again, this would be calculated by reference to each property’s market value under the connected persons rules. The landlord may, however, be eligible for a special relief known as incorporation relief to defer these gains into the base cost of the properties within the company. This would alleviate any immediate CGT liabilities for the landlord but would increase the subsequent tax payable by the company on a future disposal. Specialist advice would be required to determine if incorporation relief would be available to them as this relief is not automatic and depends on the circumstances of the property business.
Relief for mortgage interest charges
One of the tax advantages afforded to the furnished holiday lettings regime which ended in April this year was the ability to deduct interest from profits in full. After the end of this regime, the rules for relief reverted to those for other unincorporated property businesses, with relief available at 20% of the lower of:
- Eligible interest;
- Property income for the year less brought forward property losses; and
- Adjusted total income.
These restrictions do not apply to property companies, and it may therefore be an attractive proposition for landlords to incorporate their businesses to benefit from relief from associated interest charges in full.
Other considerations
Another benefit for an incorporated property business is that it has limited liability which affords a further layer of protection for shareholders.
Conversely, there will also be an increased administrative burden from operating as a company. These additional compliance obligations and associated costs will be a further leakage from profits not experienced by unincorporated landlords.
Conclusion
In assessing whether incorporation would be beneficial it will be necessary to look at the whole picture and consider each of these factors in turn. Each landlord’s personal circumstances will dictate whether this would be a worthwhile proposition, and we would recommend consulting with your usual RG contact before opting to incorporate.
Photo by Jakub Żerdzicki on Unsplash