Find out what’s happening in the property investment arena both in the UK and internationally
#TaxTuesday: Week 4 – Tax benefits for Limited Companies
April 25, 2017Article by Paul Avery
This week for #TaxTuesday we tackle the full range of taxes affecting property investors (see our first post), assessing the extent of the benefits and efficiencies that buying through a company affords.
Tax benefits: stamp duty
This charge, along with the additional 3% payable on second homes and investments, is unavoidable for the vast majority of people. Using a limited company makes no difference.
However, if an individual or a company purchases many properties in a single transaction, commercial stamp duty relief is attainable. A rough guideline for quantity is six or more properties. This is really only relevant for funds and institutions buying from a single seller. Theoretically, it is also possible for syndicates of individual buyers acting in unison to avoid stamp duty, but matters are complicated when the interests of these people later diverge – particularly around the eventual sale of the asset.
Tax benefits: income tax
For properties held within a limited company, rental income is taxed at a corporate rate rather than as part of your personal income tax. That means that the investment income stream is effectively separated from any other income from employment until the proceeds are removed from the company (more on that later).
Currently standing at 20%, but due to be cut to 17% by 2020 (with talk of a future trim to 15%), corporation tax is reliably as good as or better than the lowest income tax bracket. It was not always this way: the rate was 30% as recently as 2008. But corporation tax has only ever fallen since the 1980s and will likely continue to do so.
Having your rental income taxed at the corporate rate is plainly good for profit margins, but that is not its only benefit. A second reason to incorporate is to sidestep the new rules limiting tax relief on mortgage interest payments.
Companies are still allowed to deduct mortgage payments from rents before calculating taxable income, and there has been no significant sign so far that this is due to change. It means that there is no barrier to leveraging assets and maximising profits as before – incorporation is a safe haven for the lucrative buy-to-let model we know well. The only caveat is that mortgage products aren’t quite as cheap or as easily obtained, though this is constantly improving.
Tax benefits: capital gains
The sale of property by a company still incurs capital gains tax, but companies benefit from indexation relief – something unavailable to individuals.
Indexation relief essentially compensates for the impact of inflation. It means that you can claim tax relief on gains made from older properties in proportion with official inflation figures. A property bought for £100,000 and later sold for £200,000 would normally suffer capital gains at the corporation rate of 19% on the £100,000 profit. However, if the government’s index has increased from 100 to 150 in that period, the seller will only be taxed on £50,000 of post-inflation profit, a considerable saving of £9,500.
Tax benefits: inheritance tax
If death and taxes can’t be escaped, then the death tax is doubly unavoidable. Strictly speaking, incorporating provides no direct benefits to your potential inheritance tax bill. However, there are advantages when it comes to other forms of estate planning.
We will deal with estate planning in next week’s post as part of a broader answer to the killer question: how do I take money out of the company?
Disclaimer: tax advice is never one-size-fits-all. The government takes all circumstances and applications on a case by case basis, and so should investors. For help assessing your individual situation, seek bespoke advice from qualified experts.
We partnered with tax expert James Hume of Steel Tax London to create this series. Steel Tax can be reached at 020 3291 1943, or through their website: http://www.steeltax.london. If you have any questions for us about the contents of Tax Tuesdays, feel free to drop me a line at firstname.lastname@example.org.