Property matters
Property is an investment and many financial advisors will advocate investing in property as a sound way to grow your retirement nest egg. When it comes to property matters, there’s more to consider than just the purchase price. However, there’s a lot more to it than just purchasing a buy to let residential property.
You may be weighing up whether to purchase this through a company or in your personal name. There’s no right or wrong answer; it depends on your long term goals and needs for the rental income.
There are costs to purchasing a property, not just the actual cost of it and any refurbishment costs it may need to bring it up to a standard that makes it an attractive proposition for tenants.
In property matters like this, understanding the wider tax and cost implications is essential. There are some considerations below that you should take into account.
Stamp Duty Land Tax
| Company | Individual |
| At the 5% surplus rate depending on the value of the property | At the 5% surplus rate depending on the value of the property |
Mortgage
Typically the interest rates will be higher for a company taking out a mortgage compared to an individual.
Taxation
Tax is one of the most important property matters to understand before making your decision.
| Company | Individual |
| Property profits up to £50k per accounting period are taxed at 19%. The mortgage interest is also an allowable deduction against property income for a company. | Property profits are taxed at your marginal rate of tax. If basic rate 20%, higher rate 40% and additional rate 45%. Mortgage interest is restricted to a 20% tax credit. |
You should also consider if you need the rental profits to live on.
If not, the company will pay tax at lower rates than an individual will. However, If you plan to draw the profits from the company, there will be double taxation as you will be taxed personally on this income as salary or dividends.
Bear in mind that, if the plan is to sell the property in the near future, the company will pay tax at 19% on the gain compared to an individual at, potentially, 24%, but the funds will remain in the company.
If you want to draw down on the funds you will need to pay tax on extracting these, which again is double taxation.
If the long term strategy is to keep hold of property, then purchasing through the company can work well, as you can leave the accumulated profits in the company and use these funds to purchase future additional properties.
There is also the potential to use the company like a family investment company with different classes of share where children and, in time, grandchildren can be shareholders. The share rights can allow dividends to be paid to the parents/grandparents with capital appreciation on the shares of the children/grandchildren, which is great for estate planning.
Annual Tax on Enveloped Dwellings (ATED).
If the company owns a residential property valued at £500k or more, an annual ATED return must be filed with HMRC. Where the property is let commercially to 3rd parties there is no ATED tax charge, but that doesn’t mean that you can skip filing a return. It must be filed regardless or you can end up getting late filing penalties.
If you already own a property and are looking to transfer ownership to a company, please speak to us before doing this as there are both Capital Gains and Stamp Duty Land Tax considerations here and the Stamp Duty Land Tax cost can be painful.
At the end of the day, you need to be clear on your long-term plans for any property you purchase or want to transfer, as property matters require careful planning before making the decision. Get in touch with our expert team today to get additional advice on how we can help you with your property matters!
