Letting Through a Company
With the recent changes in tax laws and the prospect of more on the horizon, many landlords are considering whether to let their properties through a company instead of as individuals. While there are advantages, there are also some significant drawbacks. Let’s explore the pros and cons.
Advantages
Legal Identity and Limited Liability
A property company has its own legal identity, separate from its owners. This provides limited liability protection, meaning your personal assets are safeguarded in case of business debts or liabilities.
Tax Benefits
From a tax perspective, rental profits through a company are subject to corporation tax rather than income tax. Depending on the company’s profits, the tax rate ranges from 19% to 25%. These rates are generally lower than income tax rates for the same level of taxable income, potentially resulting in a lower tax burden on rental profits.
Interest Relief
Unlike individual landlords, property companies can deduct interest and finance costs in full when calculating rental profits. This applies even if the deduction results in a loss. For individual landlords, interest relief on residential properties is limited to a basic rate reduction, with any unrelieved costs carried forward to future years.
Capital Gains Tax
When a company sells a property, the gain is subject to corporation tax, which might be lower than the capital gains tax (CGT) rates for individuals. This could result in a lower overall tax bill, particularly if the company’s tax rate is below 24%.
Disadvantages
Profit Extraction
The primary downside of operating through a company is the additional tax on extracting profits. To use the profits personally, you might face further tax liabilities, such as dividend tax or income tax, plus National Insurance contributions. It’s crucial to consider these additional taxes when evaluating the benefits.
No Personal Allowance
Companies don’t benefit from a personal allowance and pay corporation tax on the first pound of taxable profit. In contrast, individuals can earn up to £12,570 tax-free, provided their adjusted net income is below £125,140.
No Annual Exempt Amount for CGT
Individuals have an annual exempt amount for CGT, but companies do not. However, with the reduction of this exempt amount to £3,000 for 2024/25, the benefit is less significant than it used to be.
Transfer Costs
Transferring personally owned property to a company can trigger substantial costs. Stamp Duty Land Tax (SDLT) is payable again, based on the property’s market value, and residential properties incur additional property rates. This transfer may also trigger a CGT bill for the individual landlord, although incorporation relief can defer this if shares are received in exchange.
Setting Up from Scratch
If setting up a property company from scratch and purchasing new properties, you can avoid the double SDLT charge. However, the 3% SDLT supplement applies to residential properties, even if the company owns only one property.
Do the Sums
The decision to operate a rental business through a company depends on your personal circumstances, particularly whether you plan to extract profits or reinvest them. It’s essential to crunch the numbers to determine the most beneficial approach.
Need Help Deciding?
Unsure if letting through a company is the right move for you? Contact Jon and the team at Jon Davies Accountants for expert advice tailored to your specific situation. We’ll help you navigate the complexities and make an informed decision.
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