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Using a Limited Company to Save Property Tax

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...

1. Low Tax Rates-Limited companies only pay corporation tax at 19% (financial years 2017 to 2022 inclusive) on profits whereas a higher rate individual taxpayer pays tax at 40% or 45%, which is a large difference. 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 10% capital gains tax or 20% for higher rate taxpayers (unless the gains relate to residential property not eligible for private residence relief).
2. 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. When a company sells a portfolio property for a gain, it pays corporation tax on that gain but to extract the funds as dividends there may be a higher rate tax charge depending on your personal tax position.
3. 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. You can also utilise the dividend allowance ( £2,000 in 2021/22) where applicable.
4. 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.
5. 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.
6. Limited Liability - as always it's 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. Also be aware that since 1 April 2013 there is an annual tax on enveloped dwellings (ATED). From April 2016 all such properties valued at over £500,000 will be subject to the tax.

How we can help you

We can advise you on the best vehicle for your property investment activities.

Tax Checklist

Our tax busting checklist is designed to cover all of the common (and a few obscure) legal ways of saving tax. Of course this is a checklist and before implementing any specific ideas you must discuss them with us as everyone’s individual circumstances are different.

The checklist is designed to cover most of the routine items that the small and medium size business owner should be looking out for. There are often more ideas that a pro-active accountant can come up with so please talk to us about your own personal circumstances.

The checklist should take no more than 20 minutes to complete. You can then arrange to meet with us in person to go through any areas where tax saving opportunities have possibly been identified.

Download our Tax-Busting Checklist 2018-19

Personal Tax Organiser

Use our FREE personal tax organiser to organise all your personal tax papers to make completion of your end of year personal tax return easy.

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