Two of the most common questions property investors have are:
Should I buy my property through a limited company? And, Should I move my properties into a limited company?
The answer depends on your:
a) chosen investment strategy;
b) personal and financial circumstances/ambitions; and
c) how long you intend to hold the properties.
However, before you decide whether a limited company will improve your tax position, there are some very basic rules and guidelines that must be understood.
You will need to consider several things before you can decide if holding your properties through a limited company will be of any benefit.....
What if I am already a property investor?
Do you already own investment properties?
Are you already on the buy-to-let investment ladder?
If the answer is yes to any of the above and you are now wondering whether moving your properties into a limited company is a good idea, then consider the following fact - Properties must be transferred into a company at market value. Moving properties into a company is treated in the same way as if you were selling the properties!
What this means is that if you bought your investment property five years ago and you would now like to move it into a limited company, then you are likely to have to pay capital gains tax liability. This is because property prices have significantly increased over the past few years. The exception to this rule is if the property is your Principle Private Residence.
What about buying my first property through a limited company; is it beneficial then?
As a general rule, if you intend to re-invest the money you have made through your property investments, i.e., you want to continue re-investing the profits into acquiring more properties, then it will be beneficial.
There are two tax benefits of growing a property portfolio through a company, explained below:
a) If you are a lower- or middle-rate tax payer, then you can extract money out of a company by way of a dividend without paying any tax.
However, if your dividend extractions take your personal income into the higher-rate tax band, then you are liable to pay tax at the higher rate of 40% on this amount.
b) It is possible to wind up your company in a tax efficient manner and take the money out.
Here are some additional favourable benefits to consider when deciding whether to own your properties through a limited company:
• A company can define its own accounting period. However, the accounting period cannot exceed 18 months.
• You only pay stamp duty at 0.5% when purchasing company shares.
• You will enjoy lower tax rates as companies pay 21%.
• Properties can be transferred within companies without incurring a tax liability.
• Dividends can be extracted from a company in a tax efficient way.
Here are some additional drawbacks to consider before deciding to own your properties through a limited company:
• Companies cannot use the annual personal CGT allowance. This allowance is £9,200 for the tax year 2008-2009. This means that if you have a property in joint ownership, you will lose out on your combined capital gains allowance.
• Official company accounts must be produced. The cost of drawing up such accounts can be 3-4 times more expensive than having your sole trader accounts produced.